Despite weak economic data, the week of options expiration has been marked by solid gains, with rebalancing flows propelling markets higher. However, intraday volatility should still be anticipated since Gamma is negative.
Negative Gamma, in this case, refers to the decrease in the value of an option as the underlying price increases.
To retain a delta hedged position while dealers/market makers/options traders are net "short gamma," option dealers/market makers are forced to buy high and sell low. In this case, they are forced to chase the market while the market moves higher.
In part 3 of my options article series, I will explain Gamma and how delta hedging works while being "short gamma."
If you want to learn more about options, I wrote a comprehensive guide.
That tends to drive up the underlying security price and increase volatility.
Rebalancing flows refer to the movement of capital between asset classes to maintain a desired level of risk. For example, an investor may rebalance their portfolio by selling stocks that have risen in value and buying stocks that have fallen in value. Portfolio rebelancing
This week, the market rebounded, with the SPX500 surpassing $4050, which offers minor support above $4000.
Several large call option expiries between $4075-$4200 may now act to push markets higher in the coming days for the SPX500.
Despite the fact that 4200 is a considerable distance from last week's low of 3900, it is crucial to consider the possible effect of rebalancing flows toward more inelastic markets.
What's an increasingly inelastic market?
When many people want to buy something, but not many things are available to buy, prices go up. That's what we call an "inelastic market."
The market has recovered, but a poor scenario persists, and volatility is still anticipated. That's due to dealers' lack of motivation to trade in a manner that would lessen volatility.
Also, risk assets that are associated with one another, such as Bitcoin, continue to struggle and have not had a comparable rebound.
That is hardly evidence that everything is going well. Those who are bullish on the market and those who are bearish on the market have both experienced losses and are careful.
Bear market rally?
A week ago I mentioned that bears should be very careful (Which was after May 20 OPEX)
The market jumped back up. However, the most violent rallies happen in the bear markets. Late bears are being punished.
Going "all-in" and "long" might be a trade that is already too late.
You could try to fade the market, but is an extra squeeze worth the juice?