Ok, since I have mentioned it briefly in my last post, I want to shed some light on an issue that could have a huge market impact tomorrow. I also want to note that there are way smarter people out there on twitter (check out Andy Constan for example) that have a lot more in-depth knowledge about this hidden mechanic and you might want to check out what they have to say too.
The issue in is most simplest form is this: At 4450 sits a MASSIVE call position (open interest 47237 (!) contracts) and those calls are expiring tomorrow. We know, that this is a short call position, sold by JPMorgan to an option dealer back in September. We also know that this position will get rolled all the way up to about 4900 by tomorrow. What are the implications?
1) When the dealer bought this position September 30th, he had to delta hedge against it to partly erase his long position in the market by selling futures worth more than 10 billion dollars. Tomorrow now, when those contracts disappear the dealer has to buy back futures on a massive scale. We know that, but..
2) The position gets also rolled to about 4900, which means JPM is selling a massive amount of calls back to the dealer, who then has to delta hedge again (sell futures). Both trades do not cancel each other out, since the delta of the new call position is only 0.55 vs 1 from the old position, and according to some calculation the dealers have to buy back futures tin the neighbourhood of several billion dollars. Thats massive.
When will the trade happen? Not at once for sure as JPM tries to avoid market impact as much as possible, but the trade is also to big to fly under the radar. It is probably wise to expect that dips will meet a strong response and strange things will happen, so be careful. The water might not easy to navigate tomorrow.
The issue in is most simplest form is this: At 4450 sits a MASSIVE call position (open interest 47237 (!) contracts) and those calls are expiring tomorrow. We know, that this is a short call position, sold by JPMorgan to an option dealer back in September. We also know that this position will get rolled all the way up to about 4900 by tomorrow. What are the implications?
1) When the dealer bought this position September 30th, he had to delta hedge against it to partly erase his long position in the market by selling futures worth more than 10 billion dollars. Tomorrow now, when those contracts disappear the dealer has to buy back futures on a massive scale. We know that, but..
2) The position gets also rolled to about 4900, which means JPM is selling a massive amount of calls back to the dealer, who then has to delta hedge again (sell futures). Both trades do not cancel each other out, since the delta of the new call position is only 0.55 vs 1 from the old position, and according to some calculation the dealers have to buy back futures tin the neighbourhood of several billion dollars. Thats massive.
When will the trade happen? Not at once for sure as JPM tries to avoid market impact as much as possible, but the trade is also to big to fly under the radar. It is probably wise to expect that dips will meet a strong response and strange things will happen, so be careful. The water might not easy to navigate tomorrow.
Note
Update 10:20 AM: Apparently the roll happened. New call strike 4925 (put 3810/4520 since its a collar)Note
Need to be more precise. The roll is initiated.Note
First: The described trade had not much impact. Does this mean it was just not relevant, or does this mean it was only able to sterilize an otherwise overwhelming amount of selling pressure? We will see and I will post a gamma update over the weekend. Second: Happy new year!
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Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.