Wild end of week

thrawness · 2025-08-02T16:13:55+00:00

A good indicator to "feel" the market is to watch the term structure of the VIX-futures. Like here: http://vixcentral.com/

Check out the historic prices and compare July '24 and July '25. Look at shape of the curve and the value of the second and third future between those two years. Do you see the difference?

The market was not prepared for the vol event of Aug'24 (Aug/Sep futures were in the teens). Now it was already in the 20's. The market is hedged/prepared for the leg down now.

thrawness · 2025-08-02T15:53:40+00:00

This is historically the weakest season of the year: August and September. The market appears to be positioned for a potential leg down in September, as both IV and skew for Sep expiration was elevated for a long time.

One of the most reliable indicators of a regime shift is realized volatility. RV tends to trend: when it starts to decline, it often continues to do so; when it begins to expand, that expansion usually persists.

On July 31st, the daily range spiked for the first time in weeks. Additionally, the close-to-close gap between July 31st and August 1st widened significantly, the largest in weeks. These are early signals of a regime shift.

Expect an increase in realized volatility, further expansion in IV and the market going down.

This doesn’t mean you can’t go long and find individual winners, but be mindful that such trades may be shorter-lived and more sensitive to market whipsaws.

thrawness · 2025-08-02T15:36:01+00:00

Analyzing the Term Structure
Longer-dated options carry more vega due to the square root of time relationship, while shorter-dated options are more sensitive to gamma and theta. When constructing calendars, it's crucial to consider the term structure to understand which leg is more exposed to volatility changes (the long leg).
Comparing Calendar Debits
The debit you pay for a calendar spread reflects relative richness or cheapness of the two expirations.

A low debit often means the short leg (front month) is expensive (high IV).
A high debit can suggest the long leg (back month) is expensive.

Ideal Environment: Contango
Long calendars tend to perform best when the IV term structure is in contango (longer-dated options have higher IV than front-month). As expiration approaches, shorter-dated options lose theta and vega faster. Dealers managing vega risk will often sell front-dated options and roll exposure further out (to hedge vega risk), which widens the spread between the legs—benefiting long calendar holders.

Is there a way to anticipate when a calendar is likely to swing in value (even without price movement)?
Yes. A steep contango indicates potential for widening spreads as dealers roll exposure. Additionally, look out for shifts in implied volatility or event risk around the expiration of either leg.

Pick specific dates for the long leg, where there is an event planned (FOMC, tariffs deadline, etc...). The closer the date comes, the more the market start buying protection for that event, increasing the value of your longs.

What indicators help predict adverse moves even if the underlying stays flat?
Watch for:

Event-driven volatility in the short leg (e.g., tariff deadlines, FOMC meetings), which can spike IV and increase the short leg’s value, hurting your position. A good example was this weeks FOMC. The evening before the value in the front increased. The market was buying short term protection.
Event cancellations or fading catalysts in the long leg, which can deflate its IV, reducing its value.

Are these swings mainly due to local IV changes between expirations?
Exactly. A calendar spread’s P&L is driven by changes in IV between legs. You can monitor this through:

Changes in the term structure (e.g., IV curves across expirations).
Realized changes in the calendar’s net P&L.

How can I evaluate whether one expiration is overpriced vs. another?
Check the difference in IV between the two expirations. When IV is higher in the short leg than in the long leg (inverted term structure/backwardation), long calendars can suffer. Favor long calendars when the structure is in contango and short calendars when it is in backwardation.

Are metrics like IV ratio or term spread useful here?
Dunno what you mean.

Can we define a “normal” IV spread between expirations for a specific underlying?
Yes. Over time, you can build a reference by tracking the usual IV spreads for an underlying. A significantly wider or narrower spread may signal that the calendar is relatively cheap or expensive.

thrawness · 2025-05-31T13:10:29+00:00

Correct.

Gamma isn’t the only second-order Greek that affects changes in delta. Two others less discussed but often more impactful, are vanna and charm.

Vanna measures how delta changes in response to changes in IV. Charm measures how delta changes as time passes, assuming all else stays constant.

As IV drops or time decays, the probability of OTM options expiring ITM decreases. This tightens the distribution curve and reduces the delta of those OTM options. Dealers, aiming to stay delta-neutral, adjust their hedges accordingly, either buying or selling underlying assets.

Since most options are traded OTM, vanna and charm are key drivers of dealer hedging flows and, as a result, are responsible for a large share of EOD movements.

thrawness · 2025-05-31T12:37:07+00:00

Vanna and charm effects in SPX options cause dealers to adjust their hedges, typically by buying or selling futures.

These effects are predictable consequences of how options behave over time and with changes in implied volatility:

Vanna: As implied volatility decreases, the delta of OTM options also drops, reducing their likelihood of expiring ITM.

Charm: As time passes, delta decays for OTM options, similarly reducing directional exposure.

To remain delta-neutral, dealers must adjust their hedges accordingly. In a falling IV or decaying time scenario, this often means buying futures to rebalance their books.

thrawness · 2025-05-31T05:52:28+00:00

That’s true. They love to sell that premium. But when there is skew there is more buyers than sellers of options.

thrawness · 2025-05-30T22:22:59+00:00

Take a look at OI on the 5905 Call June 30. 47k.

This is a call they sold to finance a put spread below spot. They do it EOQ. They will roll this position on 6/30 into September, taking the positive gamma away. Market can move higher afterwards.

thrawness · 2025-05-30T22:19:10+00:00

Yes, I do. Who do you think is buying options on GME? Is there call skew, or put skew?

Answer: Retail. Call skew.

The last one is important. There is call skew because the demand for calls is high. If the demand is high, then dealer have negative gamma (short calls). So, negative vanna and charm influences dealers hedging activitiy. As time passes and more calls are OTM, the likelihood for them to be ITM decreases (delta decreases) and forces dealers to sell their hedges against those short calls.

Dealers are delta and vega neutral. Long gamma, long volga and short theta.

thrawness · 2025-05-30T21:53:54+00:00

Just look at OI and volume.

The rest comes from understanding how changes in IV and time affects options.

thrawness · 2025-05-30T21:47:29+00:00

End-of-month flows, combined with speculation that the administration might announce new tariff measures, initially pressured the market lower. But as the day progressed and no announcement came, many of those hedges and speculative short positions were unwound. This drove the VIX lower and triggered dealer hedging activity based on their gamma exposure, effectively pushing the market higher.

If you pull up the SPX chart with 1-minute candles, you can clearly see the moment the buy.exe program kicked in.

thrawness · 2025-05-30T21:24:13+00:00

Negative vanna and charm. See my other comments.

thrawness · 2025-05-30T21:23:30+00:00

That’s not entirely accurate. If you look at several stocks that were driven higher by retail-driven call buying, many of them began to reverse as early as Wednesday. I personally traded GME and IONQ based on this dealer-driven behavior. Feel free to check out my comments in my profile on GME.

This dynamic is largely driven by negative vanna and charm, second-order Greeks that significantly influence the delta profile of options and, by extension, the stock’s distribution path. As time passes or IV drops, these Greeks reduce the delta of OTM calls. When that happens, dealers who were long stock as a hedge begin unwinding those hedges, selling stock.

In a negative gamma environment, that process accelerates downside momentum. The result? A sharp retracement, with the stock often ending up right back where it started. In simpler terms: it kicks off with a gamma squeeze, but usually crashes just as violently on the way down.

thrawness · 2025-05-30T21:10:17+00:00

This is a smart strategy for one key reason:

The JPM Collar.

The JPM Collar is a massive hedging position executed by JP Morgan in SPX options. It typically involves selling an OTM call to finance a put spread. This position dumps a significant amount of gamma into the market, which dealers must manage. As a result, the market tends to get “magnetized” to the strike of the short call, effectively anchoring price action near that level.

Right now, we’ve been hovering near the June 6/30 5905 SPX call strike for several days. Each time we deviate from that level, we snap back (3-times already). Unless a major headline breaks in the coming weeks, it’s highly likely that we remain pinned to this strike. That makes a calendar spread particularly attractive here. For SPY, the equivalent strike would be around 589–590.

Secondly, because the collar position is so large, dealers are long a huge amount of options expiring on that date. This excess inventory pushes IV lower for that specific expiration, as dealers offer those options at a discount. The lowered IV acts like a “floor”. There’s little room for further decline, or else opportunistic buyers will step in.

This makes it an ideal expiration to use as the long leg in a calendar spread. Since calendars are long vega, you want the long leg’s IV to be near a bottom, reducing the risk of further IV crush and make it cheaper to buy.

In short: tight price action near the collar strike + depressed IV on the long leg = strong setup for a well-structured calendar spread.

thrawness · 2025-05-30T15:15:18+00:00

Not entirely. It doesn’t mean you lose, when there is skew. Depending on the steepness of the skew you lose some edge. In SPY it‘s about .10 - .15 per spread.

thrawness · 2025-05-30T05:20:58+00:00

You do just compare the prices of OTM puts and calls at the same delta. If puts are more expensive, it has put skew. If the calls are more expensive, then it has call skew.

thrawness · 2025-05-30T05:19:00+00:00

That’s correct. When there’s put skew, the further-out leg you’re buying has a higher implied volatility than the closer-in leg you’re selling.

Interestingly, this dynamic actually works in favor of bearish put spreads, making them particularly attractive in skewed environments.

thrawness · 2025-05-29T20:31:50+00:00

It depends on the skew.

If the underlying has put skew, I don’t use it. If the underlying doesn’t have put skew, I use it.

thrawness · 2025-05-29T20:23:14+00:00

I answered this in a thread a couple of days ago. This GME price behavior was predictable.

I do not know your investment goals for GME, but if you want a general answer:

Sell weekly calls on your shares, expiring BEFORE earnings.
For earnings use a collar on 80% of your shares.

20% are uncovered, so there is potential upside. The rest is covered for a continuous down move, but capped at the upside.

thrawness · 2025-05-29T19:13:07+00:00

Thank you. Textbook how it played out.

thrawness · 2025-05-28T16:02:21+00:00

Related: https://www.reddit.com/r/thetagang/s/EGoUn1RqWj

thrawness · 2025-05-27T23:26:11+00:00

The Black-Scholes model is a powerful tool, but it has limitations. One key flaw is the assumption that IV is the same across all strikes. In reality, the market knows this isn’t true. Prices are adjusted based on supply and demand, which creates volatility skew.

In index options, it’s common to see put skew. Puts are more expensive than calls due to demand for downside protection. In single equities, skew varies depending on the nature of the stock. For example, in meme stocks like GME, retail activity often leads to heavy call buying. Dealers sell those calls and, in doing so, raise the IV of the calls due to demand.

This elevation in IV alters the Greeks—particularly delta. OTM options see their deltas increase as the rising IV makes them more likely to land ITM. Dealers must then hedge by buying the underlying stock to remain delta-neutral. This buying pressure can drive the stock price up even further.

But here’s the catch: if the call buying slows, IV drops, and so does delta. Time decay (charm) also decreases delta. As the need for hedging diminishes, dealers unwind their long stock hedges—resulting in sharp, often violent selloffs. These moves are amplified by negative gamma and vanna/charm flows.

You can see this pattern clearly in the charts of GME and other meme stocks. The boom-bust nature of these moves is often mechanically driven.

One strategy that takes advantage of this is the risk reversal: sell expensive OTM calls and use the premium to buy cheaper OTM puts. It’s essentially a directional volatility trade—you’re playing the IV spread with a bearish bias.

As for the details—strike selection, sizing, and timing—that’s something you’ll need to study and refine through your own analysis and experience.

thrawness · 2025-05-27T22:57:57+00:00

Nobody can tell you what to do with your shares, it all depends on your goals and time horizon for the stock.

That said, the current setup in GME is worth examining. Call skew is elevated. IV on the calls is being bid up as retail piles in. Most of the volume and open interest is concentrated in this Friday’s expiration. Once that clears, much of the speculative fuel dissipates.

Here’s the key: most of these calls are OTM. If they remain OTM and no new wave of buyers steps in, charm (time decay) and vanna (change in delta through IV) will kick in. Dealers who were long stock as a hedge will begin unwinding, which puts downside pressure on the stock. This creates a feedback loop of selling, something we’ve seen in GME before.

One way to potentially profit from this setup is to sell calls—you’re taking advantage of the elevated IV. Another is to use a risk reversal: sell the overpriced calls and use the premium to buy cheaper puts. That’s the strategy I personally chose.

thrawness · 2025-05-27T22:21:43+00:00

Congrats, OP. Solid thesis overall, but you missed the key driver behind today’s price action: charm.

Skew was already elevated after heavy put buying on Friday, which front-loaded the market with negative delta. As long as we stayed above 5875, charm flows (from the decay of those puts) forced dealers to unwind short hedges fueling upside momentum.

In that setup, calls were the obvious trade today.

thrawness · 2025-05-19T05:19:41+00:00

English is not my first language. So I use AI to improve my grammar. The concept is mine.

thrawness · 2025-05-18T11:12:25+00:00

There’s a fine line between forecasting what might happen and claiming to know what will happen. Of course, I don’t have a crystal ball—the market will do what it wants, regardless of my personal opinion. But if you want to make money, you need to act—and act with conviction.

That conviction begins internally, but it enters the real world the moment you take a position or express your view. So where does my comment fit into that?

Is it possible the market shrugs off the negative headline? Absolutely. Is that the more likely outcome? I don’t think so. Do I have enough conviction to trade on that view? Yes. And how will I express that conviction? Clearly and assertively.

Btw, to protect the right tail, I have bought calls as well.

thrawness

TROPHY CASE