Feb VIX OPEX Recap. "CPI *CRUSHES* EARNINGS AND RAISES GUIDANCE...💥

Hedging flows leave the market confused. What's next?

CPI came in HOT at the worst possible time for the market...

Why?

Remember wayyyyyy back in our January OpEx week newsletter when we talked about the VVIX spiking on the back of ~250k VIX Feb 17 Calls bought for ~$0.67?

(read the original coverage here on Reddit)

"inflation adjusted"

Well, fast forward to yesterday. 

CPI beats and raises, coming in at 3.1% y/y vs 2.9% expected... 

Turn on any financial news network and see scared souls behind strained smiles assuring you this is all OK because "cuts are still coming, etc., etc." - 

*...*but we all know better. The market knew, too, yesterday that soon real rates will matter again. 

An overdue "healthy" pullback commenced but went a bit too far and the pickup in volatility (and skew) began to send VIX into dangerous territory 👀

Because those VIX Feb 17 Calls which were essentially written off coming into the day...

were resurrected in style->

👀

...as at least one "offsides" dealer's late-day short covering flows set off a vicious spike in VIX as 140k contracts were bought into EOD on JUST THAT STRIKE and at least as many minutes were shaved off some poor market maker's life expectancy...

Ultimately what ensued was pandemonium, as the panicky short covering translated into a SPIKE in SPX skew and "crashy" put premiums which were already coming from low levels (as we've reminded you, a few times...), and sent the index dangerously close to testing the 48-handle.

Eventually those flows abated.

Once north of 17, anyone paying attention would know it's time to turn palms out and start selling into the "technical" strength, as into Opex... "what goes up, must come down" and as quickly as those calls/ futures were bought, it would have to be sold.

And sold it was...

With the VIX ultimately printing Wednesday morning at 14.32

...almost **exactly** where it was when the Calls were bought in January!

This was a rare setup- but a beauty, and very easy money on the run-up and the retrace, once it became clear what was going on as VIX flirted with levels north of 15 intraday.

If you don't understand- but would like to...? (We solve this!)

Unwinding the VIX hedging flows kicked off the late day bounce which extended overnight and through the actual settlement...

And without any hawkish Fedspeak or important data today to confirm the market's initial fears, buyers led on light volumes.

Almost poetically... the index shook off a barrage of mysterious red headlines, as 0DTE charm & gamma hedging fueled a late day thrust which- quite fittingly, ended with a kiss at ~5000 for the Valentine's Day settlement. 

Tomorrow, afternoon Fed commentary may help us answer the question-

(Note: this afternoon resolved nada- Waller's lack of commentary let the market do what it does best into Opex... grind)

Was this whole retracement bullish, or bull-sh**...?

Why would we question the strength?

Take a look at the charts below, from the guys at @OptionsDepth.

**If you aren't following them yet, do yourself a favor- and learn everything you can about what's going on here. . .**👀

Gamma

Charm

Gamma... & Charm... posted ~2hrs before Wednesday's close.

SPX dealer hedging flows were literally pointing to 5000 as a high-probability target as charm was strongest around the 5000 strike for Wednesday's expiry...

This is pinning behavior- and you are actually able to spot it unfolding in real time thanks to a more technically correct version of SPX dealer positioning.

If you aren't paying attention to this YOU ARE MISSING OUT.

Stay tuned- more to come on flows & Opex as we brace for seasonal weakness & the "gamma unclench" into the second half of Feb 🍻

G'night & hope you had a wonderful VOLentine's Day 🍻

   ~ Carson