What Will Happen Tomorrow - JPM Collar Trade?
Equities this past week have been very quiet, with the SPX having a range of only 0.75% over the last 6 sessions.
In fact, the 0DTE SPX at-the-money straddle on Friday, in front of a key Core PCE data print, was a paltry $25.5 (45bps).
That pricing is as low as it gets, reflecting that traders think that markets will continue to do… nothing.
But here at SpotGamma, we think that is all about to change…
… AND we have a brand new way for you to watch it change AS IT HAPPENS.
Why this change?
Enter, the infamous JPM Collar Trade.
In what might be the most well-known option trade in existence, each quarter a large JPM Hedge Fund (JHEQX), sells ~40k contracts of an out-of-the-money call to fund a long put spread.
In this case, the call they are currently (heavily) short is:
40k contracts at the 5,750 strike, expiring tomorrow, Monday, 9/30.
That 40k short call position means dealers are long a literal ton of Gamma, which you can see on our brand new TRACE heatmap and strike plot, below.
TRACE is powered by SpotGamma’s new proprietary open interest models, allowing us to show you the latest in dealer hedging flows – flows that update throughout the day.
You see the changes as they happen.
This means that on Monday, when the existing JPM position(s) are closed, and rolled to new December strikes, you’ll be able to see it happen.
Further, you’ll see how it changes the dealer hedging position.
What does this matter?
We believe these trades will lead to a pickup in S&P 500 volatility.
Here’s why.
If one believes that positive Gamma is linked to low volatility (which we do), then the removal of a giant blanket of positive Gamma (AKA JPM’s short call) should open the door for volatility.
This is exactly what is set to happen on Monday, as the current JPM call is going to be closed and "rolled up and out."
The implication is then, that the new call is going to be changed to a ~5% higher strike, out in Dec '24. That is far less positive Gamma in the new position vs. the current position, expiring tomorrow.
Therefore, this expiration should allow for volatility (i.e. market movement) to expand, suggesting that starting Monday, the SPX will start moving and we’ll be relying on TRACE to show us the way.