Will Gamma Squeeze End in Tears?

Posted on

Nas higher but SP lags
ZEW in line
Nikkei 0.18% Dax -0.19%
UST 10Y 0.76
Oil $40
Gold $1923/oz
BTCUSD $11499/oz.

Asia and the EU

North America Open
USD CPI 8:30

It was a mixed night of trade in Asian and early European dealing with Nasdaq futures markedly higher while both S&P and Dow remained flat.

The relentless bid in Nasdaq continues to reflect investor enthusiasm over the winners of COVID economy almost all of which are high-tech companies that have been able to perform well in an economic regime that favors digital rather than physical transactions. The recent move in Nasdaq is starting to look parabolic with many analysts noting that much of the upside activity is being driven by options volume coming from retail demand.

The massive call buying has upended many long-standing market relationships including turning the correlation between VIX and equities on its head. Usually, volatility gauges decline as stock prices rise and risk sentiment remains complacent, but the enormous volumes of call buying have sent volatility prices as well as equity prices higher. Furthermore, the relentless bid for the high beta names such as Tesla and FANGS has forced option dealers to continuously hedge by buying the underlying name which in turn only propels prices higher in a dynamic known as “gamma squeeze”.

The history of speculation suggests that such runs never end well for the retail traders as a sudden turn in sentiment will catch many of them wrong-footed while dealers mercilessly pound their positions against them. In the end, dealers usually win but the current environment is highly unusual because this time the Fed is on the side of the RobinHood trader so the runup could become meltup before it finally incinerates.

On the docket today the market will get a look at US CPI data which is forecast to recede from its 0.4% gain the month prior to a more level 0.2% rate. The Fed has clearly stated it will tolerate higher levels of inflation in order to revive growth, so today’s number even if it runs hot is unlikely to have much of an impact. Still any significant rise in price levels is sure to rock the bond market and that in turn may begin to weigh on equities as the day proceeds.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *