Appendix for today's intraday post

Rangebounding, spot decay, liquidity, insider speculation

Prologe:
Today’s intraday post - algo predicts oscillating regime, eased negativ drift
Geopolitical context - borning US-Russia-ME alliance, its conditions, shift in the geopolitical landscape
Recent weekly post - geopolitics interaction with the market

In my today’s premarket post, there were four main statements:
1) Local gamma is low, even negative, and the theoretically derived mechanical flows favor for further gamma decay as time passes
2) Realized volatility is bid, implied vol is relatively underperformed during the spot decay, and so liquidity is low
3) We are just right at the JHEQX collar current long put strike, in a net positive speed environment into EOM, thus MMs are long vanna
4) Despite the geopolitical uncertainities, heavy bearishness, gov shutdown concerns, and growth scare, we see fixed strike skew for both SPX and VIX kinda stagnant and even shorter into the quarterly OpEx (and lower than it was on this Monday), absolutely crushed into EOM, and below its Monday lvl into this Friday expo, along with positive SPX/LTY correlation (good news are good news, bad news are bad news)
Now… this is a significant discrepancy here…

The whole narrative behind the spot decay was
to protect the market from a violent volatility squeeze and to gradually lower the market under relatively low volatility conditions. That’s why I called it an "oscillation with negative drift."
Volatility underperformed, and the grind up of the vol complex was slow enough to keep the spot/vol beta sticky.

With this approach, insiders were able, on one hand, to buy out opposing positions from certain sectors like tech and commodities; on the other hand, they managed to drive prices lower in the tech sector to make it more attractive to Middle Eastern investors around Q3; and thirdly, through the negative wealth effect, they will force the Fed into implementing QE, while not letting bears to fully capitalize on the bear-side.
I’ve written extensively about this since the February OpEx, and by now you understand it.

However, this level is not yet enough to sufficiently slow down growth.
I mention this because it’s important to understand that last year’s rally was entirely one long, protracted short squeeze through the derivatives market—I posted a lot about that last year.
A deeper level is needed, and this fake liquidity—upon which last year’s and this year’s all-time highs were built—must be washed out, because it is unstable. In the upcoming future geopolitical structure and alliance systems, the US needs stable growth, not one based on manias and bubbles.
They have to solve it this year. (This is why I called to hit ‘24 April lows)

The problem is
that by the time the spot reached the JPM long put strike and fell to 5532 (from which we went long gaining 100+ points in recent days), liquidity simply dried up because everyone ended up on the same side of the trade. And without liquidity, the market can’t function as it should.
The VIX got stuck at a high 26–27 level while the market was moving downward.

Already on Tuesday, I saw signs of falling volatility in my stochvol models; also the HMM predicted a regime shift, and then this trend became visibly apparent both in the SPX and in the VIX vol smirk, as I mentioned premarket. Additionally, L/S performance shows improvement in semis and AI, and the synthetic negative gamma supply is also decreasing, with the VIX significantly underperforming since Monday— as its drop was 2 vol points larger than what the SPX moves would have implied.

However, we are in a situation of significant negative gamma, and if the vol of vol rises again and a vol crush occurs, then in the Mag7-8—which has a historically elevated put skew—there is squeeze risk. This, in turn, would lead to a spot up/vol up scenario in the index… again.

What can be done?
Well, if Citadel, BlackRock, JPM, Goldman, and the other ‘highly respected’ leaders get together to resolve this situation, they could have their quant teams switch their algorithms to mean reversion trading after buying in at a smaller size at Tuesday’s 5528 level, thereby providing the market with some liquidity. This wouldn’t create upside momentum, but it would compress the intraday range, filling the market with liquidity, which naturally suppresses volatility.
At the same time, the market is simply oscillating (as my model predicted after yesterday’s close, posted today premarket), and it can just as easily catch both bears and bulls off guard.
Range-bound trading is Wall Street’s favorite toy—we saw it back in 2022, and it’s the same game now.

Now here comes the twist!
The JPM collar position is a very large one, with the short call strike at 6165 and a long put debit spread at 5565/4700 (with market makers taking the opposite side).
Essentially, until the expiry at the end of March, this position fundamentally determines the vanna and speed exposure for the mechanical flows. As long as the market oscillates above the long put strike and volatility comes down, the market makers’ long vanna effect produces a weak supportive flow for the market.

However, let’s not forget that the JPM long put strike represents a significant short gamma for the market makers. At that point, both the speed profile and the vanna profile reverse.

Pay close attention:
If the market falls from above toward the 5565 market maker short gamma strike, then due to the long vanna effect, market makers will have shorter vega, which naturally increases volatility.
But below the strike, this reverses: if the market continues to fall toward the market makers’ 4700 long gamma strike, then they will have longer vega due to the short vanna, which naturally decreases volatility.

Now, as long as volatility remains sticky at elevated levels above the short gamma strike, the vanna effect is supportive below the collar strike, since high volatility results in a shorter delta in a negative speed negative vanna environment.
Why? Because vanna is nearly zero where gamma is at its lowest. Therefore, when the spot approaches the short gamma strike from above, as volatility rises and dealers acquire longer delta positions, the vanna effect weakens, eventually becomes zero, and then reverses below the strike.

However, all positions can be bridged on a weekly or even intraday basis.
By this, I mean that if volatility does not rise but rather falls around the short gamma strike, then the spot can break through the strike and close below it—and furthermore, from that point on, decreasing volatility, combined with the negative vanna effect, will push the spot lower and lower, along with the positive charm flow, toward the other end of the speed profile at the 4700 strike.
But according to the code, the braking effect can already be felt around 5114.24. At those levels, the algorithms generate significant liquidity, culminating in a slow grind of spot down/vol down.
Note, that my model isn’t saying that the negative drift has suddenly become zero, but rather that it’s now very small (written today). In other words, the downward trend is still there, but we’re seeing strong oscillations that push volatility down, gradually guiding momentum across the JPM long put strike.
(That’s why many people mistakenly believe that the JPM short gamma strike has any pinning effect—but this is a misconception.)

Therefore, my current tactic is a short vol trade, as I written premarket, without any directional take. We need to watch where we stand relative to the collar strike.
With this, the insiders achieve three things: 1) they fill the market with liquidity while 2) driving the spot down to a deep level that triggers QE and encourages buying by Russian and Middle Eastern investors, and 3) when they close the collar at the end of March, and it is ITM, the buyback flow induces supportive flow without an elevated spot/vol beta.

This scenario is important to consider, which is why I continuously emphasize that we proceed day by day here and closely monitor the volatility cycles. In an environment like this, do not get married to either side. That’s a golden rule!
It’s all about the volatility trade as I keep saying…