S&P Shorts "Fully-Covered" Amid "Macro Fatigue", Downside-Hedging-Flows Return

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by Tyler Durden
Monday, Apr 04, 2022 - 02:50 PM

We have perhaps seen the end of the recent meltup as Nomura warns markets are suffering from some "macro fatigue"...

...and BofA confirmed in a trading desk note this morning that "our model's S&P 500 short could be fully covered..." adding that "we are in the late-stages of a short-cover-rally as the implied vol spike in heavily-shorted names has started to fade..."

This is important since, as Nomura's Charlie McElligott has detailed in recent weeks, the Equities 'recovery' has been "funded" on three fronts:

1) the liquidation of crowded, short-dated Index / ETF option downside hedges as spot rallied / vol hammered into a massive “Positive Delta” thrust around- and out-of the March Op-Ex;

2) the ensuing impulse re-allocation of Longs from Systematic funds of large $magnitude on said “spot rally, vol crash” dynamic; and

3) resumption of highly-speculative Retail “YOLO’ing” behavior via the Options complex, buying short-dated / highly-convex deep OTM upside in “meme” stock favorites in attempted “Gamma squeezes” via Options Dealer hedging flows.

While speculative activity in “meme” stock Options has too only accelerated, ("Weaponized Gamma” bellwether / absolute leader of the “Options tail wagging the Index dog” TSLA has seen a shocking +$19.0B of Call prem spent over the past two weeks ALONE, vs +$7.9B of Put prem), McElligott notes that the S&P is now modestly "Long Gamma and Long Delta", while critical "Growth Tech" bellwether QQQ is also "Long Gamma vs Spot"...

Additionally, we are starting to see a shift from the recent trend with the re-emergence late last week of some pretty sizeable “Negative Delta” flows in Index / ETF options - predominately through the return of downside hedging (Puts and Put Spread buying in Equities themes, downside in Credit / HY ETFs, downside in Inflation / TIPS ETFs, upside in VIX), but also seeing a touch of “upside” monetization (e.g. Call selling in XLF) as well—Take a look at Macro / Index / ETF flows from Friday ALONE (h/t Alex Kosoglyadov):

  • EFA: Buyer of 40k May 60 Puts for $0.20

  • FXI: Buyer of 7.5k May 32/27 Put Spreads for $0.80

  • HYG: We saw multiple Put Spread buyers on our desk and away (Buyer of 20k May 78/75 Put Spreads for $0.24, Buyer of 20k Apr 80.5/78 Put Spreads for $0.21, Nomura client bought 3k Jun 78/74 Put Spreads, Nomura client bought the May 79/74 Put Spreads 5k x 7.5k)

  • IWM: Buyer of ~30k May 6th 165 Puts for $0.35

  • TIP: Buyer of Sep 120/117/113 Put Tree, paid $0.05 for 20k  

  • VIX: Nomura client bought 14k May 30/40 Call Spreads for $1.08

  • XLU: Over 53k Puts traded on the day, flow incl a buyer of 7.5k May 71/68 Put Spreads 5k x 7.5k

  • XLF: Seller of 124k Apr 29th 39.50 Calls at $0.34. Also, Nomura client bought 6.4k May 36/32 Put Spreads for $0.47

Given all of that, SpotGamma notes that the S&P is in a “void” of sorts while prices are near 4550.

4600 is our Call Wall level, which is where we see significant resistance and the top of our range. 4500 is where gamma flips to negative. We expect the market to shift to one of these levels by tomorrow, which sparks the next “cycle”.

These cycles are driven by feedback loops.