Quote:You might recall that on Monday evening, in a post for this platform, I noted that coming out of options expiration, the "gamma pin" lost quite a bit of its influence. In other words, option hedging was no longer likely to keep things "calm." When dealers' gamma profile flipped negative, it meant that, instead of mechanically insulating the market from large moves, dealer hedging would instead entail market makers selling into a falling market, potentially magnifying the swings. Well, guess what? According to Kolanovic's estimates, dealer hedging accounted for between $40 billion and $50 billion in selling pressure this week. And then there's CTAs, which likely de-leveraged to the tune of $40 billion to $60 billion on JPMorgan's estimates.Sword Of Damocles | Seeking Alpha
Quote:As large and positive aggregate gamma impacts the realized volatility directly (dealer need to buy when the spot falls and sell when the spot rises, thereby dampening the potential spot moves on either side), persistence of long gamma positioning can lead to low volatility over extended periods of time. As per our estimates, aggregate gamma on the S&P 500 was positive for more than three-fourths of 2019, and hence we believe this to be a significant cause of lower than expected volatility last year. Heavy gamma positioning was also among the main reasons why the S&P 500 escaped any drawdowns amidst all the US-Iran news flow in the first week of 2020.
Following the large expiries late last week (VIX last Wednesday, everything else last Friday), two macro shock catalysts created a profoundly negative price impulse which sent spot levels in equities index, equities vol. and rates deeply through prior ranges, which drove dealers into short gamma territory, meaning that instead of insulating market moves as they had been previously, dealer hedging flows would see them pressing into the directional moves [which in this case] meant shorting into the new lows in equities, buying VIX and buying USTs/STIRs the more they rallied. From Bubble To Bust - S&P 500 Index (:SP500) | Seeking Alpha