Hi Paul - Most simply when volatility unwinds then "vanna is gone" meaning that there is a lower bound of sorts for implied volatility. and once that is met then the vanna fuel is not in play. We just had a major "vanna market" last week with all the high implied volatility pushing options prices around, and so that has a big impact on the options deltas and hedging flows.
As always awesome Video Brent. I dont see QQQ and SPY vanna models on the website. The only one available is for SPX. Also the one on SPX does not show Time Adj line.
Question! Achieving Delta neutral, in the spy chart, was done using the red delta skew curve line as the baseline, however for the second chart of qqq, he’s using a straight line as the baseline to achieve delta neutral. So, I’m a bit confused as to how to determine the baseline… is it the delta curve vs canna curve, or a horizontal, flat baseline and if so, how to determine where that is… thank you to whomever might answer my question and apologies if it is a silly question.
Baseline so to speak is the red line and the purpose here is to try and isolate the impact of vanna with the black line.The big takeaway is the skew of the entire model - If the curves tile from top left to bottom right that tells you that dealers have more to buy as the market goes higher, and sell as market goes lower. Conversely if the model is tilted from top right to bottom left then it suggest dealers will SELL as market goes higher and buy as market goes lower. Hope that helps.
Thank you Brent & team! Recent subscriber here and I have a (perhaps very basic) question... If I correctly understood your explanation, would it be fair to say that, once the region of minimum vanna-adjusted delta is reached (around 4135 on your figure), there is a natural tendency for the spot price to trigger down movements as it "tries" to take distance of that value (to one side or the other), due to the dynamic hedging by non-retail traders?
I think I understand your question. If IV is near lows compared to realized like it is now - then yes IV gets “jumpy” to the downside and this can make stock vol jump in kind. Demand for puts increase and or options increase in value which in theory leads to dealers selling shares. Let me know if this answers the question.
This reminds me of the daily rebalancing of leveraged ETFs which can result in selling low & buying high to get that daily return of the index it follows.
Hi, I am a bit lost on understanding shorting futures when the market moves up or down. To me, it makes sense that when the market goes down, the market makers will need to short futures to hedge their position. The reverse is true when the market goes up, naturally they should BUY futures. But you were saying they short the futures when it goes up. Do I miss something here?
Marker Makers are AGNOSTIC. They don't take a position in making the stock price go up or go down. It will move on it's own.... the DELTA risk is the $$$ the market maker will Make/Lose if the stock moves up $1. Sounds crazy, but the MM wants their Delta to be $0.00. They don't want to take directional risk. The buy/sell options to offset any profit/loss (+ or - delta)... this model say that when prices go up too quickly, they are DELTA +... so they have to SELL (which drops their risk exposure) to get back to 0. However, due to the change in volatility (which changes with stock movement) seemingly non-intuitive things happen. MM are not Stock Investors. Your Motivations and Their Motivations are not the same.
At the beginning of the video he says that we are assuming market makers are long calls and short puts. When the market goes up, the premiums on those puts get IV crushed and since they are short puts, their delta goes up and hence they have to sell futures to get back to delta neutral.
What happens if OI remains unfilled? Let say a dealer gamma hedge their position using BS model on Vanna and Charm. If they sell puts or buy calls to keep their position hedged what would happen if no one buy their puts or sell their calls? In other words Vanna/Charm still has counterparty risk, no?
You could sell or buy options to hedge, or trade futures/stock to hedge. I think what you are referring to is "convexity risk" wherein market makers need to be long options on the tails to hedge our large market moves.
@@spotgamma but what happens when sell order or buy order options to hedge not get filled? Meaning those orders remain open near expiration. Won't that be a risk that failed to be hedged. Especially in illiquid situation will be tricky no. I can't buy VIX so there's risk as a retail using synthetic replicator.
Dealer would be short put and long calls. I get that as the market goes down the IV goes up which would cause an increase in delta for the long calls, but wouldnt the fact that the market is moving further from the calls decrease the delta?
Thanks, this is the most useful description I have ever seen.
Appreciate the feedback. Thank you
Thanks Brent and the SG team for al the hard work that goes into your charts !
8:50 (that's just a timestamp for me, love the videos I use the HIRO indicator daily.)
awesome, love the feedback. thanks
Thank you. This lesson was very very much needed!
Thanks, could you as well elaborate about vanna timing, as Cem often says vanna goes on vacation, and what makes her leave and come back? thx
Hi Paul - Most simply when volatility unwinds then "vanna is gone" meaning that there is a lower bound of sorts for implied volatility. and once that is met then the vanna fuel is not in play. We just had a major "vanna market" last week with all the high implied volatility pushing options prices around, and so that has a big impact on the options deltas and hedging flows.
good video thank you
Great job Brent!
appreciate it!
Good explanation thanks
thank you sir!
Thanks, great education as always!
thanks Oliver!
As always awesome Video Brent. I dont see QQQ and SPY vanna models on the website. The only one available is for SPX. Also the one on SPX does not show Time Adj line.
yes, pushing them live soon!
Question! Achieving Delta neutral, in the spy chart, was done using the red delta skew curve line as the baseline, however for the second chart of qqq, he’s using a straight line as the baseline to achieve delta neutral. So, I’m a bit confused as to how to determine the baseline… is it the delta curve vs canna curve, or a horizontal, flat baseline and if so, how to determine where that is… thank you to whomever might answer my question and apologies if it is a silly question.
Baseline so to speak is the red line and the purpose here is to try and isolate the impact of vanna with the black line.The big takeaway is the skew of the entire model - If the curves tile from top left to bottom right that tells you that dealers have more to buy as the market goes higher, and sell as market goes lower. Conversely if the model is tilted from top right to bottom left then it suggest dealers will SELL as market goes higher and buy as market goes lower. Hope that helps.
@@spotgamma perfectly answered, thank you so much!!
Thank you Brent & team! Recent subscriber here and I have a (perhaps very basic) question... If I correctly understood your explanation, would it be fair to say that, once the region of minimum vanna-adjusted delta is reached (around 4135 on your figure), there is a natural tendency for the spot price to trigger down movements as it "tries" to take distance of that value (to one side or the other), due to the dynamic hedging by non-retail traders?
I think I understand your question. If IV is near lows compared to realized like it is now - then yes IV gets “jumpy” to the downside and this can make stock vol jump in kind. Demand for puts increase and or options increase in value which in theory leads to dealers selling shares. Let me know if this answers the question.
Do you ever do this calculation for Russells?
We do, yes!
This reminds me of the daily rebalancing of leveraged ETFs which can result in selling low & buying high to get that daily return of the index it follows.
yeah it is a bit like that...good analogy.
Hi, I am a bit lost on understanding shorting futures when the market moves up or down. To me, it makes sense that when the market goes down, the market makers will need to short futures to hedge their position. The reverse is true when the market goes up, naturally they should BUY futures. But you were saying they short the futures when it goes up. Do I miss something here?
Totally agree.
Marker Makers are AGNOSTIC. They don't take a position in making the stock price go up or go down. It will move on it's own.... the DELTA risk is the $$$ the market maker will Make/Lose if the stock moves up $1. Sounds crazy, but the MM wants their Delta to be $0.00. They don't want to take directional risk. The buy/sell options to offset any profit/loss (+ or - delta)... this model say that when prices go up too quickly, they are DELTA +... so they have to SELL (which drops their risk exposure) to get back to 0. However, due to the change in volatility (which changes with stock movement) seemingly non-intuitive things happen. MM are not Stock Investors. Your Motivations and Their Motivations are not the same.
At the beginning of the video he says that we are assuming market makers are long calls and short puts. When the market goes up, the premiums on those puts get IV crushed and since they are short puts, their delta goes up and hence they have to sell futures to get back to delta neutral.
Can one use the 5 day trail at the highest tier and downgrade to lower tiers on the monthly subscription?
sure
i didn't see Vanna Adj. Delta, time Adj T+1 under Vanna Model charts. only (current + next expiration) am i click the wrong page :(
Hello, its not you - its me :) We will add that time (T+1) line in soon!
@@spotgamma thx a lot. Just made my first monthly subscription payment.:)
What happens if OI remains unfilled? Let say a dealer gamma hedge their position using BS model on Vanna and Charm. If they sell puts or buy calls to keep their position hedged what would happen if no one buy their puts or sell their calls? In other words Vanna/Charm still has counterparty risk, no?
You could sell or buy options to hedge, or trade futures/stock to hedge. I think what you are referring to is "convexity risk" wherein market makers need to be long options on the tails to hedge our large market moves.
@@spotgamma but what happens when sell order or buy order options to hedge not get filled? Meaning those orders remain open near expiration. Won't that be a risk that failed to be hedged. Especially in illiquid situation will be tricky no. I can't buy VIX so there's risk as a retail using synthetic replicator.
Dealer would be short put and long calls. I get that as the market goes down the IV goes up which would cause an increase in delta for the long calls, but wouldnt the fact that the market is moving further from the calls decrease the delta?
yes, re:calls, but the put delta of the short put increases