On the LaDucTrading morning show August 5th (which I hosted from crash day August 5 to 9) I talked about how worries about an economic calamity were way overdone and that SPX was heading to 6000. Calamity, sure. More data this morning on small business confidence soaring - what a recession...... but that's not what the selloff was about.
We can't know exactly what it was but sometimes the stars just align to bring out the worst in markets. Carry trade/BOJ hike, tech overconcentration, historical vol too low (6.5 in mid-July), skew at 20 year lows, Iran/Israel, Harris rally, curve un-inverting, short vol trade too big.... pick your poison, but it was enough to overwhelm a market that hadn't seen a 2% selloff in much too long. And they pushed on the spring but good on August 5.
Now we're out of the negative dealer gamma range below 5300 - I warned on the show that a move through 5350 could produce a melt-up as we moved out of that negative gamma range below 5300. And now Vol Targeting CTAs may have to re-allocate after pulling the ripcord that week. Equity allocations plunged and might start to feel FOMO again. Rates are dropping into good GDP which could compress real rates and compel folks to shift back into equities. Buyback window is open for corps. Yes, margins may be under pressure after companies had run the table with pricing power over the last 3 years, so there are some challenges (cue the premium harvesting - which we at Gamma do in a RISK-MANAGED way).... but $6-8 trillion on the sidelines.... yes, a lot of that is happy there but still....
In addition, we saw no VIX ETN calamity either - in fact, AUM in short-VIX ETN has soared since Aug 5. Will this be a problem a la 2018 one day? Maybe, but not yet. People are hammering the vega and loading up dealers with long gamma which is supportive of markets right now.
One lesson from last week is that timing your protection is a tough game. Skew before that day indicated that no one felt they needed protection anymore.... until they DID on Aug 5. Protection can come in handy and you should consider it - timing it is tough without the right indicators (Gamma's got us to the sidelines in time). This is one of the things we've been teaching for years in our programs. Risk-managed option selling - there's really no other way to do as folks have realized. I've seen too many option sellers get absolutely steamrolled in the past few weeks. Make $10 then lose $50. 90% win rates mean nothing when the other 10% loses you 4 times what you made (yes even if it's unrealized).
Gamma Covered Call and Cash-Secured Put management programs. And the Gamma Volatility Alpha program (targeting pure volatility)
Reach out today - https://calendly.com/crushthepremium/15minutes
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