Market insight May 27, 2022

Fresh reminder, the liquidity is weak because of the upcoming holiday weekend when US equities markets will be closed on Monday. Thus, prices may display extreme volatility.

Low liquidity suggests few buyers and sellers in the market, which may contribute to more volatility since prices might fluctuate more drastically. That is true in the case of the following holiday weekend when there will be even fewer market participants.

An increase in the number of calls bought at strikes above the current price of SPX. We haven't seen this in a while, and it suggests that investors are becoming more bullish.

That could be a false breakout due to the lack of liquidity in the market.

Today's expiration is not particularly large, but a significant portion of SPY's gamma expires today. Most of this gamma is concentrated in the 400-410 range.

SPX500 broke above $4000, we could expect "put option" prices to start falling faster due to two things: an increase in "negative gamma" and a shift higher in "implied volatility" (IV).

Negative gamma means that the options market is becoming more bearish. At the same time, a shift higher in IV indicates that investors are becoming more pessimistic and are buying up options as protection against a further drop in prices.

Since the SPX500 broke above $4000, volatility declines if we test $4200-$43000. That's because implied volatility will start to fall, which will reduce the value of put options.

The Vanna of an option measures how much the value of an option changes when the underlying(ie spot) price changes.

If the SPX500 breaks below $4000 and Implied Volatility (or VIX) increases, the Vanna force will be strong, which will drive the prices of put options.

BUT, since the SPX500 breaks above $4000,  expect the opposite to happen - the price of put options to decrease due to a decrease in negative gamma and a shift lower in IV.

If you want to learn more about options trading, I wrote a comprehensive guide/article

https://romanornr.medium.com/options-trading-fd4d0bffb2c5

Bitcoin

The institutional demand for bitcoin that many investors have been waiting for is not likely to materialize anytime soon.

JP. Morgan: Flow pace into publicly listed bitcoin funds, including bitcoin ETFs

Nasdaq

The NASDAQ index is making a rebound after hitting its 20-day moving average, which is a positive sign for the technical health of the market. The recent sell-off in tech stocks has been severe, but the market may be now oversold and due for a rebound. The key level to watch is 12,600, resistance from the recent downtrend.

Any upside move could be magnified because options traders are still overwhelmingly bearish on tech stocks since we are in "short-gamma" land.

When option dealers are "short Gamma," they're positioned for limited moves in the underlying asset. That often happens when traders are bearish on the index (Nasdaq) and expect it to move lower. However, because all moves are magnified in Short Gamma land, the underlying (Nasdaq spot) can make a strong move higher, causing pain for the Short Gamma trader.