From Left-Tail to Left Sidelined
Markets are scrambling to recalibrate after an unexpected, dramatic rollback from the U.S. and China over the weekend. In a move that exceeded expectations, the U.S. slashed tariffs on Chinese imports from 145% to 30%, while China reciprocated with a drop from 125% to just 10%.
Disclaimer: I was writing this article in the morning before the U.S. stock market opened so things may have changed as I am seeing a lot of news being dropped during the day.
The cuts are time-limited (90 days), but the shock wave was immediate. Treasury Secretary Bessent reinforced the pivot, saying neither country wants "decoupling"
"Neither side desires decoupling" isn't just diplomatic window dressing.
It's the functional end (at least for now) of the "U.S. Stagflation and "Global Growth Shock" trade that's been dominating as a macro position since Q1. The "hard reset" of the narrative that pushed funds into defensive, duration, and commodity-linked recession hedges.
Major upside risk to growth forecasts and downside risk to inflation
What we are seeing is the rapid destruction of left-tail hedges. Trades priced for a self-inflicted recession and worsening of global slowdown are now being unwound aggressively.
- Recession odds are falling sharply, not because the economy improved overnight but because of one of the most acute self-imposed risks (spiraling tariffs and global decoupling) just got removed from the near-term
- Macro hedge books that were tilted towards downside tail protection are melting. That includes short-risk expression across FX (short USD), rates (steepeners, duration longs), and equity factor rotations into low beta and defensive.
- Crowded trades are being forcefully reversed. Oil is going up, volatility is collapsing and cyclical equities are seeing explosive moves up
This is the hated rally and the policy move nobody wanted. The pain trade. Not because markets were against it, but because few had it in their playbooks.
However, if you read this post back on April 6th or read our Discord, you probably bought the bottom when SPX500 fell into the 4800-5000 area.
Romano
And much more in the Discord.
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Investors, institutions, banks, and traders all faced more chop.
Instead, they got a full-scale rollback of punitive tariffs, which has been a structural overhang on global growth sentiment for months.
The scale of the cut and China's of the same magnitude is a massive unwind of escalation. It's not permanent, as it is a 90-day window, but the direction matters most right now.
That, combined with Bessent's explicit rejection of "decoupling," shows that the White House is at least, for now, rethinking its more hawkish tone and recent trade rhetoric.
Markets have been burned before by sudden reversals, and there's still a credible risk that tariffs will snap back.
The 90-day window creates rolling optionality on both sides of the Pacific. July 8 (global tariffs) & August 10 (China-specific) now serve as de facto inflection points where policy risk will re-enter the conversation.
On Bitcoin side, I played well.
Romano
Sold Gold & Bought Bitcoin
Gold (GVZ) volatility & Bitcoin volatility (BVIV by @volmexfinance)
— Romano (@RNR_0) May 7, 2025
The spread is extremely wide here pic.twitter.com/YGXjFScwj0
The short/gamma squeeze
Refresher on options gamma
Gamma measures the rate of change of the option price relative to the underlying. Negative gamma indicates that the option price will fall when the underlying asset's price rises. As the underlying price rises, it becomes less probable that the option will be "in the money."
If you want to know more about gamma, I wrote an article about gamma and delta hedging and how that influences a lot of price action.
https://romanornr.medium.com/options-trading-part-3-gamma-curvature-risk-9f6dd4b3db5b
Dealer gamma is the total of the gamma of all options a dealer holds. A negative dealer gamma suggests that the dealer has more options expected to depreciate/decay when the underlying market rises.
That means intraday volatility will increase since the dealer will need to alter the pricing of their options as the underlying asset price fluctuates.
Option dealers are short calls and long puts on index and single-name tech stocks. As prices rise sharply (such as +3%), dealers have to buy stocks or futures to delta hedge their positions. The higher the market goes, the more they have to squeeze.
During March, April first, and April second, the market was in a true negative gamma market fashion; dealers were compelled to chase their deltas, increasing the market's downward pressures. We saw continuous liquidations.
When market participants keep buying "put options" (positive gamma, negative delta), the dealer, on the other will be stuck with the opposite trade, which is "short-put" and therefore has a positive delta and negative gamma.
Prices were falling much more than expected. This forced dealers to hedge their bets and sell the underlying or futures to return to delta-neutral, making the market fall further. We saw large investors selling their positions while individual investors were not active.
As mentioned in my options article about gamma & delta hedging
https://romanornr.medium.com/options-trading-part-3-gamma-curvature-risk-9f6dd4b3db5b
Continuing, now I get the question a lot:
What is Negative Gamma?
Negative gamma is a measure of convexity. It is the second derivative of the price of an option with respect to the underlying asset/market price. In other words, it measures how the price of the option contract changes as the underlying market price changes.
An option contract with negative gamma ("short-puts, short-calls" and whatever strategy gives a negative gamma exposure.... like short straddles or those old FTX MOVE contracts)
Dealers will have to hedge and chase the delta by selling low as the market falls and buying high as the market moves up. Gamma works in both ways.
Leveraged ETFs (TQQQ, SOXL etc) also create synthetic gamma. They rebalance at the end of the day, buying more of what went up to maintain 2x or 3x leveraged exposure (For crypto people, you probably remember leveraged tokens).
Since the Mag-7/Mag-8 dominates, they create localized but heavy flows into the close.
Apple, Microsoft, Nvidia, Amazon, Google, Tesla, Meta & Avgo are not only heavily weighted in indexes, but also dominant in options open interest. That creates a double impact (index hedging flows, single-name hedging flows)
This is an involuntary flow, and it's happening into a market already short on optionality on the upside.
Many traders/institutions/banks had been selling calls or not hedging the right tail, assuming that the upside was capped due to recession and policy risk. The position now creates forced buying.
So if spot continues to rise, especially if we break through key dealer "short gamma" levels, this feedback loop could extend the rally even further, regardless of fundamentals.
With vol control largely done buying, today's move is being amplified by negative gamma dynamics from both real (dealers) and synthetic (ETFs). If the move holds or speeds up, expect accelerating buy flows into the close, especially concentrated into the Megacap tech. This is now less about macro and more about positioning mechanics catching up with the surprise policy reset.
The hated rally isn't risk-free
Last week, at the U.S. Depository Strategy Annual Banks Dinner, there was a sense of fresh optimism coming from Washington, especially among GOP insiders. Congressman French Hill, who chairs the House Financial Services Committee, and Dr. Arthur Laffer, a White House advisor, both spoke positively about moving forward with Budget Reconciliation.
Fiscal optimism matters, especially as it aligns with the new momentum from the US-China tariff détente. Macro tailwinds can happen just as the market is re-rating growth risk higher.
There are concerns that the markets are rallying too fast. The Risk is there. A re-emboldened White House, as rising equities and falling volatility may give the administration perceived room to reintroduce hardball tactics.
Especially as we approach the 2 "pause" deadlines
- July 8: When global tariff relief is set to expire
- August 10: When China-specific cuts roll off
Things can swing back very quickly in the other direction. The concern is that if Trump sees stocks up 15-20-25% off the lows he may be tempted to "Twist the knife" again and reclaim the spotlight by taking a harder stance. Especially if polling or economic headlines shift.
Policy risk is likely to start creeping back into options market, especially through
- Rolling VIX upside call positions into July/August expiration
- Selling short-dated vol, which has collapsed, to fund longer-dated tail protection
- Position around event vol windows, i.e. the 90-day tariff roll-off dates
Even as volatility comes off, tail hedgers aren't going away. The "no decoupling" line was a regime changer, but it's not a regime guarantee.
Now layer that back into the current rally dynamics. We are currently deep in short gamma territory, particularly with Mag8 and Index products.
If prices continue to pump rapidly in low-liquidity areas, these accelerant flows stemming from dealer hedging, ETF rebalancing, and momentum traders could lead to forced de-grossing in positions that were originally set up for macroeconomic deterioration.
Now that positioning is reversing violently and colliding with structural liquidity gaps, you get air pockets and feedback loops.
There's a fiscal optimism brewing, but the real near-term market driver is flow and structure. The risk is that this rally overshoots just enough to provoke a political response.
As we approach the policy tariff deadlines in July and August, if volatility sellers fail to re-hedge their positions appropriately, any unexpected tweet or post about a tariff threat could catch the market off guard once more.
A single headline has the potential to shift everyone’s perceptions again.
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