Have you been vigilant with your recent hedging activity? If so, people like you are partly why #skew is catching a bid in US equities markets.
Despite these being protective flows, we feel this leaves a growing potential for a move down with a vol pop.
Here is a breakdown☟☟
Warning I: Persistently firm skew could be a symptom of dealer short downside in uncomfortable amounts given the macro risk.
Warning II: With #OPEX supportive flows out of the way, it’s important to stay on top of the market trends and keep a close eye on potential risks.
Even as vol has been resetting lower in US equities, skew has held up well.
A positive carry tells us that realized vol hasn’t been that spectacular vs implied (see first graphic below)
However, on the way down, skew is catching a bid, going up right across the US indices.
Why?
Because people actually own the market and they need protection.
Even Carl Icahn apparently bought Fed/March Puts, which made the rounds on #fintwit.
#VIX calls are getting bought in US indices, telling us that protection buying is going on.
Skew is not coming down as much, even if in absolute levels of Puts have pulled back.
Realized skew metrics also show short-dated downside bid vs at the money/upside (see second graphic below)
➠ KEY TAKEAWAYS
These conditions persisting would be a symptom of hedging activity taking dealers short downside in uncomfortable amounts given the macro risk.
Dealers are being lifted out of amounts they are not comfortable with being short.
And what’s the way market makers protect themselves when they get lifted out of a lot of volatility?
They keep their pricing high!
They don’t want to have larger short vega exposure once they start hitting their vega limits.
➠ Traders who stay vigilant and adaptable are more likely to weather market storms and come out on top.
So keep your hedging strategies up to date with market conditions and be prepared for any sudden changes in sentiment.
Is this stubborn skew a pre-cursor to an outsized break lower in the market as dealers are forced to hedge?
Let me know what you think in the replies!
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