Good Morning,
- Similar to last week, yesterday's volatility was primarily confined to the intraday price action, with a substantial high-to-low spread of 1.42%.
- From a structural standpoint, a significant number of investors also capitulated on their unprofitable weekend hedges, which enabled dealers to buy back their delta exposure.
- We suspect this likely contributed to the directional component of the move, as the rally was accompanied by both a collapse in skew and a modest decrease in Put premiums.
- However, dealers are still short a significant amount of gamma, so all else being equal, we'd expect the volatility to continue.
- It's crucial to note that our upper band is currently trading below the level where dealers would shift into positive gamma territory, suggesting that this higher volatility environment will continue until further notice.
- Although realized volatility has remained relatively subdued so far, the fact that dealers will be trapped in negative gamma suggests that these levels still have a chance to increase, potentially serving as the catalyst needed to spark more significant selling pressure from Systematic funds that use volatility as a toggle for their equity exposure.
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-Tier1 Alpha
