As Stocks Tumble, "Market Is In Control Of Puts"

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by Tyler Durden
Wednesday, Oct 28, 2020 - 08:55 AM

An ugly overnight session for US equity markets echoed Europe's bloodbathery but has shifted the underlying technicals in the market to favor the downside. DAX is now down 12% from its October highs.

As Art Cashin wrote earlier

“.. the heaviest part of the selloff coincided with announcement that Macron of France would make a national address at 8:00 p.m. Paris time (around the New York close). Speculation runs to multi-week lockdown and possibly even closing the borders.”

And that is dragging on US stocks...

As SpotGamma details, futures have broken down to 3340 which now places the market in control of puts.

As we have discussed at length the big concern at this price level is for volatility to rapidly expand. This is because there are large Dec put positions and as the market pushes lower it may activate heavier put hedging.

This also likely makes the market more sensitive to changes in implied volatility[IV]. As volatility(ie VIX) rises the value of puts increases and additional dealer short hedges may be required (this hedge adjustment around IV changes is that “Vanna” buzzword).

Gamma is tilted towards Puts, may indicate puts are expensive. Negative gamma is moderate, favoring further swings in the market

Of course puts being closed and/or IV coming down could push dealers to buy back short hedges. The issue here is that most of the puts are related to election and/or end of year hedges, and as such the bulk of them will likely be held through any “pre election” selling.

For today we think monitoring IV (VIX) is key – higher VIX likely means lower markets and vice versa.

3300 is the obvious downside level and the Delta Neutral Price level is at 3276, with 3400 the the only resistance area we see above.

Is it time for a call yet?