SPX Gamma Wrap
The SPX declined 2.8 percent and continued to collapse in the after hours (-3.6%) as earnings didn’t come to the rescue.
Catalysts for the move lower were the threat of lockdowns in Beijing and a warning from Russia's Foreign Minister Lavrov that there is a "considerable" chance of nuclear war, if the West continues to deliver weapons to Ukraine.
Also there are now clear signs that Europe is about to implement energy sanctions in the coming weeks, while Russia stopped its gas flows to Poland.
The gamma picture looks ugly: Market makers now have to deal with a negative gamma amount of 1069MM, which could lead to some spectacular moves tomorrow.
The VIX closed at about 33.5 percent and any mean reversion would cause the price of put options to decline substantially, which would then force option dealers to buy back futures fast.
On the other hand: Just because dealer gamma has reached a “floor” and the VIX is trading within its “post-invasion upper band” (see chart below) does not mean that the selling could not intensify from here.
https://www.tradingview.com/x/INkqPPFB/
Should the market drop below 4100 then the record amount of open interest at 4000, which is higher than at any other strike, could pull the market lower with force.
In the not very probable case that 4000 doesn’t hold, all bets would be off, as a high amount of put contracts at lower strikes like 3900/3800/3700/2600 would move into the money and cause a unprecedented wave of dealer selling.
Catalysts for the move lower were the threat of lockdowns in Beijing and a warning from Russia's Foreign Minister Lavrov that there is a "considerable" chance of nuclear war, if the West continues to deliver weapons to Ukraine.
Also there are now clear signs that Europe is about to implement energy sanctions in the coming weeks, while Russia stopped its gas flows to Poland.
The gamma picture looks ugly: Market makers now have to deal with a negative gamma amount of 1069MM, which could lead to some spectacular moves tomorrow.
The VIX closed at about 33.5 percent and any mean reversion would cause the price of put options to decline substantially, which would then force option dealers to buy back futures fast.
On the other hand: Just because dealer gamma has reached a “floor” and the VIX is trading within its “post-invasion upper band” (see chart below) does not mean that the selling could not intensify from here.
https://www.tradingview.com/x/INkqPPFB/
Should the market drop below 4100 then the record amount of open interest at 4000, which is higher than at any other strike, could pull the market lower with force.
In the not very probable case that 4000 doesn’t hold, all bets would be off, as a high amount of put contracts at lower strikes like 3900/3800/3700/2600 would move into the money and cause a unprecedented wave of dealer selling.
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