Here We Go Again: Another Futures Fund Is Caught In A “Short Gamma” Trap

Remember when the catalyst for the relentless, seemingly inexplicable broad market melt-up in mid-February was revealed to be an overeager short-biased hedge fund, which had been caught in a “short gamma” feedback loop, forced to buy more S&P futures the higher the market went? Well, as RBC’s Charlie McElliggott writes, the “short gamma” feedback loop appears to have returned as yet another fund is now caught in the same trap, and the market will soon test just what the fund’s point of margin call max pain is, potentially taking the S&P to 2,400 – if not far higher – on short notice.
As McElligott laments, “It’s awkward to write about this… AGAIN” which however won’t stop him from doing just that, and explains as follows:
GUESS WHO’S BACK…MORE ‘SHORT GAMMA’ COCKROACHES, from RBC’s Charlie McElliggott
The same dynamic at play during our last equities ‘melt-up’ is seemingly back ‘in-play.’ Remember the hypothetical story on the multi-billion dollar open-ended futures fund which found itself ‘synthetically short’ size SPX due to its strategy where it sells multiple upside calls for every in-the-money long call? Well the macro ‘relief rally’ yesterday reintroduced that very same ‘gap risk’ which this type of strategy hates.

This post was published at Zero Hedge on Apr 25, 2017.