Critical flow to follow - the Quarterly Put Spread Collar

Dec 16, 2022

Why is the end of Quarter Put Spread Collar such an important position to know?

Today the Dec30th 3835 Call was nearly ATM. Why is this so important?

I'm working on an entire module on this exact order flow this weekend so I'm going to drop a substantial portion of that content here for free tonight or tomorrow - here's a good synopsis for you.

JPM has (3) very large "hedged equity" funds. Their hedge?

They buy (in the SPX) a 3-month out Put Spread Collar loosely defined as follows:

  • Short the down 20% Put

  • Long the down 5% Put

  • Short an upside Call to make this approximately worth 0.00

  • They buy a lot - around 45,000 SPX spreads!

Often the call they sell is between +2 and +4%, may be a bit higher this time around given the nature of the vol structure.

This resulting position becomes EXTREMELY dominant in the OI, with respect to setting levels, pivots and areas of magnetism.

Currently, the open CALL from the structure that they opened on the last trading day of Q3 is the 3835 Call

As we get closer to expiration, this inventory has a greater and greater impact on the hedging behavior of the dealer community carrying the position.

If we are below it, and dealers are short delta against it - as it decays, they will need to sell more futures to hedge the greater delta, which increases the likelihood of drifting lower - towards the strike. The converse is true if we are below it, as they would be buying their hedge back as the delta of the Call decays to 0 - implicitly bidding up the market to levels nearer the strike price (3835 in this case).

Much of this hedging will happen near the end of the day, so watch for the greatest pull towards that strike to occur after 3:30 PM ET.

This is no magic bullet - but there have been MANY quarters where we have pinned a level from this collar - too many to list.

In the course we are building out, we talk about this order from start to finish - from its initial market impact, to how its structural impact evolves as it becomes more gamma intensive and less vega intensive. We have some really great case studies built out talking about the SPX-VIX correlation that we saw during the selloff around April through June, where this collar position really did contribute to a *very high* chance that "if the market goes down, VIX goes down" (which is exactly the opposite of what people usually expect). You can actually go back and see how many articles ZH et al wrote about the confusion yourself - but IF you understood the positioning and the order flow, you really could have made a killing structuring trades that took advantage of the slow drift down (Long skewed Put flies anyone?)

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