🧵 Ever wonder why markets sometimes go completely crazy after options expiration? Buckle up - I'm about to explain why timing + volatility can create the perfect storm...
1/ First, let's talk about what happens during normal options expiration (OPEX). Market makers are constantly hedging their positions to stay neutral. It's like a carefully balanced dance. .
2/ Two key players in this dance: Vanna (how delta responds to volatility changes) and Charm (how delta changes as time passes). These create stabilizing flows that help keep markets in check.
3/ Think of it like shock absorbers on your car. During normal trading, these flows help smooth out the bumps. Market makers' hedging actually helps prevent wild price swings.
4/ But here's where it gets spicy: After OPEX, many options expire and those stabilizing flows? *poof* - They disappear. The market loses its shock absorbers. 🚗
5/ Now imagine the VIX (market's "fear gauge") spikes right after OPEX. With those stabilizing flows gone, there's nothing to absorb the shock. It's like hitting a pothole with broken suspension.
6/ The result? Volatility can spiral higher. Option premiums stay expensive for weeks. And market swings get amplified because those protective hedging flows aren't there anymore.
7/ This is why timing matters so much. A VIX spike during regular trading might cause a hiccup. But a post-OPEX VIX spike? That's when things can get really wild. 🎢
8/ Here's a real mind-bender: Sometimes $SPX and $VIX rise TOGETHER. This happens when traders get too bullish and "short the skew" - buying calls and selling puts like there's no tomorrow.
9/ When this happens, market makers end up "long the skew" - and as prices rise, everyone's positions align in a way that can create a volatility feedback loop. Wild stuff! 🌪️
10/ Key concepts to review and study: Speed/Vanna/Charm: Speed measures the rate of change of gamma with respect to price. If market makers are positive speed, their gamma increases as the underlying moves in their favor. Vanna measures how delta changes with implied
11/ IF MM are LONG SPEED: They’re long vanna, so volatility spikes cause them to sell into rallies or buy into dips, amplifying price swings. They’re short charm, so as time passes, they must buy back hedges, adding bullish pressure as expiration nears.
12/ Skew Structure: Refers to the pattern of implied volatility across strikes. In equity markets, it’s common to see a volatility skew where lower strike (out-of-the-money puts) have higher IV than higher strike (out-of-the-money calls). This happens because traders often
13/ "Short the Skew" vs. "Long the Skew" Short the Skew: Net buying upside calls and selling downside puts. This means MM(opposite side), "LONG THE SKEW" *As spot price RISES, both customers and MM are LONG SKEW- leading to + gamma growth and vega to the upside(VEGA UP due to
13 cont/ This can't be sustained at highs (less liqudity) and think my "see-saw" example.. What happens and reverses, why does $VIX drop sometimes with $SPX drop after a "rise together"? *Notice how $VIX drops and $SPX drops together post a rise together some-times? *
14/ Key takeaway: Pay attention to OPEX timing. The week after expiration is when markets are most vulnerable to volatility shocks. Plan your trades accordingly! Not financial advice.
/15: If you enjoyed this thread. Please 🔁original thread (linked below) and follow @astocks92 for more Much love to everyone and God Bless the community. https://x.com/astocks92/status...
@astocks92 Quite the read and definitely something to stick in the back pocket, much appreciation for taking the time to write it up.
@astocks92 I always appreciate your well thought/layed out content. Always very informative. Just letting you know it's appreciated.
@KyleMLaForge Thank you brother for your support and god bless you, your family
@astocks92 Well written.
@hmpatel05 Thank you bhai!
@astocks92 And congrats you know your stuff for sure 💪🏻
@Rod2ZEROnBACK Thank you for your support and god bless everyone in your family
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@astocks92 Thank you for post, very informative
@astocks92 Great explanation, I learned a lot from this!
@astocks92 This is a great post bro thank you! 🔥👏🏻
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@astocks92 Excellent thread ! What resources would you recommend to enhance your knowledge; books, videos, etc.
@astocks92 Excellent 👏. This stuff is extremely interesting!!
@astocks92 Excellent explanation
@astocks92 Thanks for the education! Seriously awesome post.
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