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Delta hedging of the Index Skew

Hi, here I made a video that explains the Index skew and how the delta hedging of it creates regular patterns in the price of the SP500:
Many Vol funds are aware of these dynamics and have their own unique strategies that go around to capture some of the alpha that these market imbalances produces.
This video was made in collaboration with Cem Karsan; those of you who follow his Twitter feed will be well aware of how he talks a lot about "Gary" and "Vanna".
Some of the dynamics he talks about are captured in this video.
RV also did an interview with him here:
https://www.realvision.com/shows/live/videos/election-jitters-at-the-peak-of-volatility-mountain

 

https://youtu.be/ibaPuJgTgOs




This video assumes you are already aware of how market makers delta hedge gamma, vanna and charm exposures. If you are not already familiar with these, 

You can learn about delta hedging of gamma exposures here:
https://exchange.realvision.com/post/an-introduction-to-gamma-and-vanna-exposure-5fb139c4b1cafb19c82096a8

And if you don't know how vanna and charm exposures are delta hedged, you can watch this:
https://exchange.realvision.com/post/vanna-and-charm-exposures-5fce493cdbaa191ccaa724df

Ramblings on end of first trading week for 2021

As someone who doesn't have a finance day-job or access to Bloomberg, its difficult to find data/search data and do calculations/analysis that I'm interested in and instead, I have to rely on scouring through FinTwit to get access to info.

Having said that, Jan 11 - 25 seems to be a very interesting time window from a few factors:

OpEX on Jan will cause a lot of the Vanna/Charm support for the SP500 to be taken out, which was helping lift markets consistently due to continual unwinding of hedges that market makers were forced to make during the election. Those final hedges come off next week opening the market vulnerable to a technical correction. Want to understand this mechanic better? Shameless self-plug here: https://exchange.realvision.com/post/vanna-and-charm-exposures-5fce493cdbaa191ccaa724df

Along with that, we see some in the FX market that 5y5y forward rates in the FX market for many high-carry FX, such as EM, AUD and NZD have been moving higher. The effects of this have reverberated in the EM FX market, as seen by recent rvol in currencies such as TRY, MXN and ZAR. This seems to suggest the market is expecting higher inflation rates on other currencies . Oh and guess what? You also noticed that the DXY stopped going down, despite GA flipping to the Dems @John Fadool , which intuitively should mean DXY -> 50, Gold -> 10,000, yet here we are, DXY perking a bit and gold puking @Jaymes Rosenthal . One key thing to note about Dems is that... (More)

Proposed US Election Macro Trade - Good or Bad? You tell me (Long post)

A few weeks ago I came up with a three-legged call options trade that I thought could preserve capital and at least one would have have such an asymmetry of payout based on all potential US election outcomes, in no particular order:

  1. clear Biden win
  2. clear Trump win
  3. hung election/social unrest

note: the above outcomes are just in the immediate aftermath of the election, not the result after it gets dragged through the courts, etc.

I am assuming a blue Senate in all scenarios; by this I am also implying that a Biden win MEANS "blue wave." Why? Because: the Democrats have a good chance at 51 seats but will almost surely win 50 seats, i.e. 50 appears to be a given. But if Biden also wins, i.e. if the Vice President is Kamala Harris, she can break any tie in the Senate. Meaning all the Democrats need for a "blue sweep" is 50 senators, not 51, and they will almost surely get 50 senators. This is important so please do not neglect this paragraph.

The legs were:

  • Long S&P (SPY calls)
  • Long USD (UUP calls)
  • Long Gold (GLD calls)

Rationale being (*I UNDERSTAND these may well be flawed* but I needed to form a base position):

S&P up if:

  • either candidate wins clearly (this appears to be the rhetoric and with last weeks sell-off it appears investors may want to plow back into SPY or FAANG...meaning SPY...if there is any election certainty.)

USD up if:... (More)

spy breaks key lvls w/ follow through from daily TD sequential 13

a break of daily set up trend as well as the propulsion exhaustion lvl and .618 relative retracement, magnet price seems to be the path of least resistance, if any of the aforementioned breaks become qualified it would signal momentum to the down side. on the weekly propulsion momentum has been broken the next lvl of support is set up trend at 310.68, if momentum down is qualified the next area to look would be the exhaustion lvl at 298.33 which lines up w/  the 1.618 relative retracement on the daily at 298.54
a break of daily set up trend as well as the propulsion exhaustion lvl and .618 relative retracement, magnet price seems to be the path of least resistance, if any of the aforementioned breaks become qualified it would signal momentum to the down side. on the weekly propulsion momentum has been broken the next lvl of support is set up trend at 310.68, if momentum down is qualified the next area to look would be the exhaustion lvl at 298.33 which lines up w/  the 1.618 relative retracement on the daily at 298.54