SPX Gamma Wrap
The SPX ended the week unchanged after being down 3.6 percent from its intraday high to its intraday low.
The early gains were largely sentiment-driven amid a belief that the market was overdue for a bounce and news that the People's Bank of China cut its 5-year prime loan rate by 15 basis points to 4.45 percent.
In our morning briefing we warned to be cautious and not to prematurely bet on a bounce, and this proved to be the right call.
The negative gamma environment is unprecedented in its duration and the markets remain very fragile. So far the retreat was overall orderly and we have not seen big spikes in implied volatility yet, but this can change at any time if a real capitulation event sets in.
In general we continue to recommend staying cautious. There is strong statistical evidence that episodes of large gamma imbalances significantly increase the risk of flash crash events.
As you can see from the attached charts below the 2010 flash crash happened during such an extreme environment, and gamma imbalances significantly increase drawdowns.
https://bucket.mlcdn.com/a/3517/3517811/images/186c92af08fe475ad8c87019534a27555bdc33cb.png
https://bucket.mlcdn.com/a/3517/3517811/images/8d3d3aec5d5bd56926d0150dd73b33c7876f28a8.png
The early gains were largely sentiment-driven amid a belief that the market was overdue for a bounce and news that the People's Bank of China cut its 5-year prime loan rate by 15 basis points to 4.45 percent.
In our morning briefing we warned to be cautious and not to prematurely bet on a bounce, and this proved to be the right call.
The negative gamma environment is unprecedented in its duration and the markets remain very fragile. So far the retreat was overall orderly and we have not seen big spikes in implied volatility yet, but this can change at any time if a real capitulation event sets in.
In general we continue to recommend staying cautious. There is strong statistical evidence that episodes of large gamma imbalances significantly increase the risk of flash crash events.
As you can see from the attached charts below the 2010 flash crash happened during such an extreme environment, and gamma imbalances significantly increase drawdowns.
https://bucket.mlcdn.com/a/3517/3517811/images/186c92af08fe475ad8c87019534a27555bdc33cb.png
https://bucket.mlcdn.com/a/3517/3517811/images/8d3d3aec5d5bd56926d0150dd73b33c7876f28a8.png
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