Good Morning,
- Dealers remain aggressively short gamma at the current levels, suggesting that higher volatility is still likely.
- However, we've seen most of the increase in volatility contained intraday, while the close-to-close volatility has remained surprisingly low.
- While there are several corners of the market we can point to as to why realized Vol has been subdued; we believe it has primarily been due to the rapid monetization of Puts during any market sell-offs, which reduces the necessity for funds and investors to have to liquidate their underlying positions when asset prices decline.
- We suspect this rapid monetization contributed to yesterday's Vol down/ Spot-down scenario, in which both the VIX and fixed-strike volatility fell even though markets moved lower.
- CTA funds have started to see some notable selling take place, with an estimated $11 billion in equity exposure sold so far this week, which is mostly associated with the trend component in the strategy.
- Combine that with some moderate selling from Vol control funds, and that total comes up to around $14B in net selling flows. Not a small number, but also not quite the deleveraging event many are making it out to be. However, we suspect these systematic strategies are just getting started, especially if dealers remain short gamma and realized volatility trends significantly higher.
- As we've been highlighting, that makes this a particularly dangerous setup from a positioning standpoint, and while every crash is different, one we've seen play out time and time again.
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-Craig Peterson
