The acceleration in a melt up market

BY ANDREW GIOVINAZZI

June 3, 2024

Yo Pit Crazies,

I wanted to put the last hour of the trading day into context with the rest of the week. Most beginning traders will learn faster if they look at things on large changes. The chart below has a massive runup in 1 hr versus the rest of the week. One can easily infer that one thing is not like the other.

5 Day SPX with SIGMA vols

Why trade a whole week, go nowhere and then launch like a rocket ship into the close Friday?

Click on through and all will be revealed plus a little surprise

Delta changes with Gamma

On Friday I saw the SPX May31 5250 call go from .05 to $30.00. The delta on the call when it was 0 was less than 1.00. Now the issue is even when the delta picks up from 1.00 to 100.00 dealers have to hedge because they cannot keep up with the new delta in the options once the SPX starts to rally. Gamma changes the delta from 1 share of stock to 100 shares in minutes. It is a big difference losing $1 per tick to $100 per tick.

They have to buy futures and did so on Friday. They can also buy calls and cover for small losses. Either way the explosive nature of an option that can jump 600 fold increases the need to hedge. An option was dead and now it was alive. The same thing happened in the 2008 GFC. Options that were dead, insurance contracts on mortgages, became alive.

The next question to ask is did this massive rally create a vol spike? I highlighted the sigmas below because traders crashed the volatility in Jun and Jul. The market move was something traders were expecting then crashed the vol post move.

The May31 cycle was a tempest in a teapot that created massive moves short term but once those contracts settled, traders looked to the outer terms and crashed the vol. It would indicate this rally should hold and set up for SPX call calendars this week.

Something I will look at Monday in OP Pro.

To Your Trading Success,

-AG