The last two months of market and volatility action is unparalleled. Usually, when the market rises, volatility falls -- since 2006, this has happened 90% of the time. The last two months, however, has seen a volatility rise connected to a market rise 25% of the time, more than double the historical average. Historically, when volatility rises and the market rises, it has been a coin flip between the skew steepening, indicating put buying, or shallowing indicating call buying, both happening 50% of the time. However, in the past two months, volatility rising has come with a skew shallowing 73% of the time, indicating massive call buying. Call buying is driving the volatility spikes and the real action is not in the index but in the single names, and the buying has not been in normal just out-of-the-money calls but way out-of-the-money calls. Consider the lower graph in the chart of the NDX components weighted averages below: The ratio of the 75 delta 30 day options implied volatility to the 5 delta has not been at the level since 2008. The 75/5 delta ratio hit its nadir in late August 2020 near the top of the market, but the call buying is continuing currently and driving this ratio down again. Another effect of this call buying in addition to moving the skew is to accelerate market moves, and volatility, around the strikes being bought. This is because market makers when short calls and the market rising causes the calls to rise, must buy the underlying as a hedge against the options sold. The market makers are buying the market as it is going up and accelerating the move. This is called the gamma squeeze effect. One way to see the gamma effect is to look at historical volatility. Historical volatility 5-day started to accelerate as the market zoomed up in late August. The historical volatility measured in 5-day periods hit 60% as the market fell off its highs. Presumably, what happened is the market neared the way out of the money strikes and caused a gamma squeeze. More reading...
"Call buying is driving volatility..." The purchase of insurance against a price increase leads to an increase of [abs]|price changes|? How'z that work, exactly?
The so called "increase in volatility" that we are seeing is the new normal for these price levels, hence the increase in margins across the board. Adjustments to data models will likely (most have done so over 2 years ago), have to be made. I find volatility indicators in themselves to be fairly worthless. However when certain aspects become out of balance, whether it be for a day, week, month etc., then volatility is the driver that brings it back into balance.
Because many of the entities selling these options need to hedge by taking positions in the underlying => market impact. Now, whether it's significant enough can be debated. Lately the argument has been that Softbank + Robinhood yoloers have enough weight to meaningfully move single names around (in the case of Softbank even the largest).
This looks significant in at least two ways: 1) sheer numbers and 2) significant movement in the skew to historically low levels. I was a market maker in single name options and backed traders. Market makers, even the much larger ones today, hedge their book as much as they can. Hedging delta is difficult when the market rallies toward short strikes where the gamma of those strikes is changing the delta massively, exacerbating the market moves as the underlying is bought when moving up and sold when moving back down. SoftBank did not admit to being this ‘whale’ but said they were more like a ‘dolphin!’
yes but it shouldn't be. This is what the OP is saying. Somebody is jacking up the price via call-buying and forcing more buying. It's almost like a massive pump-and-dump scheme only that this time somebody is pumping the whole entire market. The pumping part is fun but the problem comes when the dumping starts... If these price increases is not backed up by real value, then sooner or later the pumper is going to run out of money and that's when the dumping is going to start. And it's going to be massive. The harder the pump, the harder the dump.