December Vixpiration Redux

Deja vol all over again

There is your spot vix in dashed green and the insanely flat vix futures curve after Santa Powell the grinch awakened the convexity Kraken. Why he holds these meetings during the most important expiration of the year, I have no idea. So much for his price stability blather; it’s like he doesn’t know that options volume has exponentially grown over the last few years, partially due to the Fed’s decision making.

I intended to write a post about vixpiration; it’s something I quite often mention as the vol watershed, but I got hung up with TSLA negative delta post/trades, MSTR/BITC vol, and the digital ink on my AAPL negative delta post wasn’t even dry yet, those trades were an hour old.

Yet, I’ve only done, what, six posts so far this month on incoming market volatility?

But, even so, I wanted to ramble about vixpiration again and specifically about last December’s vixpiration (and my apologies for not writing about it in time, it’s a topic you should come here for) because on that day last year this happened:

December 21st 2023 note:

(https://en.wikipedia.org/wiki/A_Mighty_Wind

The magic of vixpiration strikes again. And, consider this, if you have vix calls as a hedge, they are useless during this timeframe, they didn’t budge, because they are based on January vix futures which opened the day at 14.6 already. That is how short vol etfs work, the front month comes to spot vix eventually and the ETF rolls every day in to the back leg, which why SVIX works most of the time. It keeps selling more expensive longer dated vol.

And that circles us right back to yesterday’s 0DTE, because the best (I’m all ears to another if you know it) way to hedge a downdraft is with short-dated options:

I mean, 10 SPX contracts for 25 cents turned $250 into $50,000. As Yakov Smirnoff used to say, ‘What a country!’. You can see in the SPX chart when the put volumes (and it wasn’t just 4750, there were a lot of strikes in SPX/SPY/QQQ trading for next to nothing that the strats were short):

People clearly think of overly shorted stocks as being ripe for an attack and thus causing a spike, why not overly shorted vol being subject to the same thing? It’s pretty cheap and easy to attempt as noted above.

Then the short gamma vortex machine turns on, a mini-volmageddon situation. And there’s no escape, when folks are forced to buy back short puts, that equals more dealer selling since they are removed of the long puts sold to them, and then there are those new puts dealers are short for the day, requiring more immediate selling.

So, first off, a point I hammer home repeatedly, is that event vol is oversold before the events now, making them inherently more volatile. (They are going to put this on my gravestone, I say it so often.) And thus as usual, the vol/Fed straddle into an major opex/event situation was quite oversold:

Even I was sort of looking the other way. Yes, I had MSTR/TSLA/AAPL/QQQ negative deltas on, but the market breadth record was like a magician’s sleight of hand trick. While these 0DTE puts were sitting here too cheap I was looking at, ahem, ‘oversold’ breadth situations in the market not in the giga tech realm.

Time to go to the optometrist to get my farsighted glasses recalibrated, fortunes were made today in a gamma grab:

It’s almost pathetic that after these mini volmageddons happen, the blind comedy on financial television. It’s pathetic really, to be honest, that these market stewards sit there debating whether the market plummeted because one higher dot or one less cut suddenly had a legion of folks in the blink of an eye decide to run to their trading platform to dump their momo stocks or at 3pm decided to take profits in client stonks they’d let run without barely looking at all year while they were golfing and they went up nearly every day.

It’s simply the vortex of volatility and convexity of gamma. Puts needed to be bought back, dealers needed to hedge short gamma, and the booming area of leveraged ETFs had to rebalance. This is your market, you are always in bed with/sleeping next to the convexity Kraken.

Today, a gamma flip seemed far out of reach, but was it? And the closer we got, the more likely it was to get targeted. Markets often don’t bounce late anymore, it’s down and dirty since stuff needs to be squared away every day in the 0DTE highly leveraged cauldron of carry and the potion that came out today was toxic:

I mean, the banana peel was one step behind the market. The flip was only 20 points away, with all these ballooning ETFs out there needing to sell billions at the end of today:

Now, one wonders (or at least I am) if we grind a lot of this back, and ‘rationalize’ in the finmedia again with the typical, ‘We solved this overbought problem, and the economy is in great shape and gigas are growing profits’..blah blah. Whatever. It’s the options stupid and IWM just went through this last month, taking the relative beating into November opex just to surge during expiration unclench up:

I guess the Santa rally can start now. All jokes aside, there is some vol to burn underneath the market finally, or as Cem Karsan would say, watch out for👸👸🦥🦥:

(Those are Cem’s charm and vanna emojis)

But if the rest of the year returns to calm, it will only stack the kindling high once again for more volatility as the year gets started. And on that note, it’s time to salute the reigning champion of toppy short vol.

Nice job vol control, you are truly the beacon for long vol and convexity mavens:

I should have trade ideas in the chat in the morning.