Ingenious1: Puts Elmer was talking about – Zerohedge article
Is This What Happens On Monday?
Submitted by Tyler Durden on 12/11/2015 23:45 -0500
Four months ago, China decided to devalue the Yuan sending a shudder up and down collateral chains globally and forcing carry trade unwinds and derisking everywhere. Friday August 21st saw notable weakness as that weakness washed ashore in US equities.. and then Black Monday struck. The ensuing debacle stalled The Fed and shocked markets.
As a reminder, JPMorgan’s “seer” Marko Kolanovic warned this week that…
“As for near-term risks—we believe the most imminent market catalyst will be the December Fed meeting in which we are likely to see the first rate hike of the cycle.“
This important event falls at a peculiar time—less than 48 hours before the largest option expiry in many years. There are $1.1 trillion of S&P 500 options expiring on Friday morning. $670Bn of these are puts, of which $215Bn are struck relatively close below the market level, between 1900 and 2050. Clients are net long these puts and will likely hold onto them through the event and until expiry. At the time of the Fed announcement, these put options will essentially look like a massive stop loss order under the market.
What does this mean?
Considering that the bulk of the puts have been layered by the program traders themselves, including CTA trend-followers, and since the vol surface of the market will be well-known to everyone in advance, there is a very high probability the implied “stop loss” level will be triggered, and the market could trade to a level equivalent to the strike price,somewhere in the 1,800 area, or nearly 200 points below current levels.
Which would be a tragedy for the Fed: after all, nothing is more important to Yellen, Draghi et al, than affirmative market signaling – pointing to the (surging) market’s reaction and saying “look, we did the right thing”, just as Draghi did on Friday when he explicitly talked the market higher in the aftermath of the ECB’s disastrous announcement.
The irony will be if, regardless of what the Fed does, the subsequent move is driven not by the market’s read through of monetary policy but by the “pin” in this massive $1.1 trillion option expiry, the biggest in many years, one which if recent market action is an indicator, suggests the stop loss strike level will be taken out in the process setting the “psychological” stage for market participants who will look at the drop in the market, and equate it with a vote of no confidence in what the Fed is doing, potentially forcing the Fed to backtrack in less than 2 days!
Whether this happens remains to be seen, and we are confident the Fed’s “arm’s length” market-moving JV partner, Citadel, is currently scrambling to prevent any imminent selloff. However, considering Kolanovic’ track record of hinting at key risk inflection risk, it is quite likely that whatever the ultimate closing price on December 16 and, more importantly, December 18, volatility may very soon have an “August 24” type event.
TnDr: Good find…yes, this is pretty much what Elmer and Iko were speaking to. The Fed is between a rock and a hard place. When the public who holds stocks feel a no confidence it is disastrous results.
What were we told here by Tony? The Dinar is the lynchpin for the GCR….logic tells us the GCR is going to fix many issues….but, there will be ripples that will probably grow to a tsunami for some for a little while.
This is a defining week. We will soon see if the ones that keep resisting have come up with a plan yet again to delay….keep an eye on Turkey/Iran/Iraq tensions…some are saying that is intentionally in place to cause problems of huge size…hope not, and hope it does not become large enough to stop this again.