Options Positioning Collapse Sparks "Potential For High Volatility" As we detailed last week, Friday's very large options expiration sparked a ~50% reduction in single stock gamma, leaving markets vulnerable to short-term volatility. As SpotGamma warned, the markets were entering a period with the potential for high volatility: This creates volatility because as large options positions expired, are closed and/or rolled dealers have large hedges they need to adjust. There is a trove of data to suggest that the bulk of single stock call activity is long calls, and based on that we believe dealers (who are short calls vs long stock) therefore have long stock positions to sell. As is clear in the chart below, there was weakness after the 11/20 monthly OPEX, and the large 12/20 quarterly OPEX... The question now is do call buyers step back in and “inflate” stocks further? As the chart below shows, call buyers showed no sign of pulling back last week, and may be further bolstered by “recency bias” (stocks only go up) and the anticipation of more stimulus. The chasm between equity call buying (blue line) and Index, ETF’s and any type of put is startling. Finally SpotGamma notes that 3800 remains a key level. We will be watching VIX closely today with VIX expiration in the AM and the inauguration tomorrow at 12EST. We again think that there is a bit of an “event risk” premium to implied volatility due to the inauguration, and so a smooth inauguration may zap IV and bring a tail wind to stocks. If VIX does trend lower then we look for markets to shift to the 3850 Call Wall area, but the critical risk line down is at 3750. Tyler Durden Tue, 01/19/2021 - 09:20