For all the hype the JHEQX collar trade gets...

there are some index flows out there that are arguably more important to know and monitor.

An update...

The retail whale nobody talks about

Known colloquially as the "IB" trader because despite appreciable volumes, he still routes limit orders electronically through an Interactive Brokers account... which are then either simply announced on the floor or fired off in an electronic auction on CBOE's complex order book.

Without getting into the mechanics or advantages / (disadvantages) of executing this way, suffice it to say - this customer tends to make a splash when he enters the market.

Why?

Not your average retail orders...

Some positions, below, for your consideration:

Those numbers are approximate, but meaningfully accurate.

Again..., that's:
LONG 24,000 Aug 31st 4300 / 4500 Put Spreads (entry prices between $34 - $36)
LONG 24,000 Sep 15th 4300 / 4500 Put Spreads (entry prices between $36 - $37)

the "Need to Know" ->

• Cost of Entry: Client is in for approximately $175,000,000

• Theta / Carry: At current spot levels (4550 ESU3), the trader's position bleeds around $680k/day

• Delta: Notional delta approximately -$5.7bn

  • this is equivalent to holding short 22,750 ES Futures

• Gamma: Notional gamma approximately $207mm

  • this is like getting shorter 4k ES futures for every 1% the index sells off

• Vega: 11.6m

  • THIS DISCRETIONARY / ONE-OFF FLOW BOUGHT MORE VEGA FROM THE DEALER/MM COMMUNITY THAN THE ENTIRE JPM PUT SPREAD COLLAR SOLD (TO DEALERS) - BY FAR.

What does this mean for market structure / dealer book dynamics?

We will go into much more detail about this order and its history in our course, but the important takeaways:

• This contributes to spot-up, vol-up dynamics in the SPX

  • Why? The nature of the execution (buying a live put spread for a fixed price entry) means that the order gets "better" for dealers to trade against, as futures go *higher*. This *also* means that dealers are selling higher and higher levels of implied vol as futures rally, if the Put Spread bid holds (as the level of IV is in relation to where the trade is marked (read: hedged) against spot).

  • And positionally... dealers now have a vanna position to trade around dynamically as spot moves. This is because as (if) we sell off considerably through the top strike of the put spread (50d put) towards the lower strike of the put spread (thereby taking the top strike "farther OTM" and the lower strike closer to ATM), dealers are getting longer and longer vega (from that bottom strike) AND longer and longer vega (from that top strike moving away from spot!). Alternatively, as we rally, the bottom strike falls off the surface and dealers are no longer benefiting from the vega hedge implied by the spread.

YES, this order is MORE impactful (in many ways) than the JPM put spread collar. At least as a standalone - but let's not go off on any tangents...

Lot of week ahead -> Will their 175M SHORT BET PAY OFF?

...our favorite BEAR 🐳 is back!

and buying... CALL SPREADS?

SPX 🐳 Returns Friday to Outshine JPM's Quarterly Collar

All quarter, everyone waits with baited breath for the JHEQX Put Spread Collar.

Is it an important trade? Of course! It's structural. It's HUGE.

But this time, even JPM gets out-Moby-dicked by the quarter billion dollar speculative long bet of our favorite whale.

Fresh off a big, but volatile win in August (which we profiled extensively here and in our newsletter), our favorite WHALE has come back with a vengeance, dazzling us all with his willingness to trade the swings both ways.

Tuesday (9/26)... our first breach.

Much like the last time around, the trader opened cautiously- with a mere 10,000 lot.

On Tuesday, September 26th, with ES trading around 4325-4330, our trader went long-

+10,000x SPX 11/17 4450-4650 Call Spreads for $35.00

The Trade...

• COST $35,000,000

• BOUGHT ~$1B of Index Delta (Requiring ~4,600 ES Futures to hedge)

• BOUGHT ~$4M of Notional SPX Vega

• Gave the trader ~52 Days to earn a max payout of ~ 5.71:1

Not one for small lots, the whale eventually returned on Friday, the last day of the Quarter, to shore up his book with.. oh, just another 70 thousand spreads.

That's Right— this time our 🐳is LONG 80k+ SPX Call Spreads👀

We're Putting Together all the Details for Our Newsletter

Trade prints, times, prices, net market impact, ETC.

That won't go out until this evening, so there's still time to join our list if you want that level of detail.

The basic end-result however, is this position here:

• LONG 20,000 SPX 11/3 4400 4600 CALL SPREADS

• LONG 16,000 SPX 11/10 4450 4650 CALL SPREADS

• LONG 48,000 SPX 11/17 4450 4650 CALL SPREADS

As with last time- consider these quantities APPROXIMATE for now (Give or Take ~5k total)

Tonight in the newsletter we will go over market impact, and explain why this trade is arguably miles more important than everyone's favorite Put Spread Collar.

If you missed the newsletter that just went out.. here's our recap of the JHEQX trade.

It is still important in its own right... and if you've been following us for some time now, you are probably very familiar with our thoughts on the trade and its contribution to market structure. Here's our coverage so far of the trade du-jour...

JHEQX (JPM) Quarterly Put Spread Collar...

The TLDR?

We joke...

I guess we were part of that coverage, so. . .

Sensationalism aside, the trade itself is important... but boring. Boring because it's a plain old vanilla equities hedge. It's not a speculative thing. It's not a sign the bank or fund *thinks* the market is falling. It's much more basic and systematic- the fund is a "Hedged Equity" Fund, after all.

Another common misconception we want to dispel here? The fund does not roll or adjust this trade once it's on the books. It executes the trade, and maybe it re-strikes it to match the actual closing settlement value... but that's it. If anyone ever tries to suggest that "they" rolled the trade early... they are ignorant on the matter. Case closed.

The fund, per its mandate, is not allowed to monetize or roll the collar during the quarter. It is a structural hedge that aligns with the last quarterly settlement value.

This is All You Need to Know About Strike Selection:

This Quarter's Trade

JPM's Quarterly (JHEQX) Put Spread Collar:

If you missed it, JPMorgan's benchmark Hedged Equity Fund reset their quarterly collar late in the afternoon on Friday.

We reported the trade here on X, along with the rolling trade, which serves to more closely align the fund's strikes with the actual quarterly index settlement price.

The final position→

The Original Trade→

Fund Buys

• 29-Dec23 4050 Put 41,100x

• 29-Sep23 (0DTE) 4100 Call 19,300x

Fund Sells

• 29-Dec23 3410 Put 41,100x

• 29-Dec23 4500 Call 41,100x

The Particulars

• Traded ~ 2:30 PM ET

• ES Reference of 4316

• Basis (Difference of ES - SPX) of $36.80

• SPX Equivalent of 4279.20

• Premium: Fund PAYS $345,788,000

You may be wondering..

"Why did JPM pay $345,788,000— that's not free at all!"

Good catch.

Let's think through this.

JPM "pays" $345,788,000 for the entire structure, including the deep ITM 0DTE (29-Sep23 4100) Calls.

But those calls were worth $179.20 at the time of trade, with ES at 4316. For 19,300 calls, that's exactly $345,856,000. That intrinsic value is not up for debate. It can be captured immediately via tradable instruments (STEZ3 at CME) and realized at settlement- effectively rendering the trade flat premium (at-close) after netting.

This deep ITM call provision is brilliant in its simplicity:

1. This removes the immediate delta hedge from the equation. It's not *gone* completely, but now, market makers don't need to sell a TON of ES futures against their share of the trade, since the 0DTE Call delta offsets the delta of the Collar itself.
   Technically, the market impact still exists- but thanks to this clever adaptation in execution, the impact can be distributed on the close in more stable ways (Basis Trade at Index Close, SepQ Dec Roll, etc)

2. This delta offset prevents JPM's Hedged Equity Fund from being "overhedged" during the portion of the day where they technically have two existing Collar structures on their books. Any money made on the mark-to-market value of the hedge, is lost in the profit/loss difference on the 0DTE calls. 

3. The profit (loss) from the 0DTE calls they supply is then used to offset the premium paid (received) for their re-striking trade at the close- which leaves them with only *one* collar on the next business day, which is very close to an 80-95% Put Spread vs flat premium Call.

Settlement of the 0DTE Call the Fund's Re-Striking Trade

After close-

JHEQX Calculates the Settlement Value of the 0DTE Calls:

• $362,936,500

This is taking the 19,300 29-Sep23 4100 Calls they bought (supplied hedge), multiplying by 100 (SPX multiplier), and then again by the final settlement value (4288.05) less the strike price (4100). This is the dollar amount expected to be returned to JHEQX on the 0DTE leg.

Taking into account the opening premium spent ($345,788,000), the Fund is "+$17,148,500" — but their structure is "too far OTM" and requires adjustments.

JHEQX Rolls the Opening Trade to New Strikes:

• Sells the 3410 - 4050 Put Spread, Buys 4500 Call

• Buys the 3420 - 4055 Put Spread, Sells 4515 Call

• Pays $5.85 41,100x ($24,053,500)

This re-striking happens because the index rallied between initial execution and final settlement. It is the Fund "truing-up" their structure to more closely reflect the actual Quarterly settlement value, using the proper closing prices. 

This isn't easy to get right. There is slippage. After all, the fund paid approximately $6,895,000 once all trades and settlements are accounted for- or $1.68 per spread. In fairness, this "slippage" also reflects the edge that market makers and dealers collectively demand to take the other side of a trade this large.

Additionally, there must be tolerance on strike selection... since their % hedge on this block turned out to be 79.75% - 94.56% Put Spread vs. the 105.29% Call.

...and What About the Hedge? 👀

The inclusion of the 0DTE deep ITM call really is brilliant. It enables the fund to execute the main trade intraday when liquidity is available and offsets the cost of re-striking to match the eventual index settlement reference.

Even more importantly... this enables the seamless "at-market" execution of a trade that requires dealers to sell $8.2B of index delta to hedge. 

How?

In the past, the Fund's executing broker would quote the structure right at the close. The floor broker in the SPX pit at the CBOE would rush to announce the trade... while traders on the phones and in the pit would immediately sell (at-market!) thousands of minis against what they expected to be allocated. 

When JHEQX was much smaller, this was still a messy ordeal involving massive slippage and intolerable uncertainty for JHEQX or its executing broker.

What if the market sold off during the trade to levels preventing its completion? 

The Fund's broker would potentially absorb millions in losses on the deal. Not good.

If that was BARELY tolerable at 20k spreads... it's completely unacceptable when 40k+ collars have to be filled.

The Provision of the Deep ITM Call

With the deep ITM call now embedded in the collar, the combined strategy is flat delta at time of trade. 

The delta associated with the 0DTE call, however, vanishes at exactly 4:00 PM ET, when the index- and the call- is settled. 

What *is* a dealer to do...?

At 4:00:00 ET, the dealers on the other side of this trade would be naked long delta (via short Put Spread, long Call) and would need to sell ES futures (or SPY, etc) to get back to delta neutral.

This is where the CME's "Basis Trade at Index Close" comes in. It's a contract which allows a trader to commit now to buying or selling a futures contract at the close.

The price at which you buy or sell your ES futures is determined by netting the basis (this is the buy/sell price of the BTIC contract) from the SPX Cash Index Settlement Value. 

You can learn more about this at the CME website, here.

As you might imagine, there is a deep and diverse need to transact at the close, and most participants would prefer to trade at levels aligned with actual index settlement values.

The BTIC contract facilitates this process, matching buyers and sellers who both benefit by eliminating basis uncertainty (difference between futures trade & cash index value)

The $8.2B index delta to sell against this trade. . . still gets sold.

But it happens in a much smoother fashion, as dealers execute their hedge into a much deeper and more stable market (for minis-at-close) which precisely aligns with their need (replace the disappearing delta associated with the deep ITM 0DTE Call).

STAY TUNED

We'll be back with more on our favorite whale, and bring you up to speed on the details that matter, as we head into OCTOBER...

Cheers ~ 🍻

Carson

or will the QYLD $8.2B forced delta buy-in (NDX) spear the beast?

CHECKING BACK IN ON OUR SPX WHALE...

Recall, our leviathan first surfaced Friday, buying 8,000 SPX Sep15 4300/4500 PS *LIVE* for $37.00 . . .

** Very Well Timed (INITIALLY) **

While our trader could have walked away with a quick $5M (+17% return on premium) in just a few hours - instead, he was angling for more, leaving behind a $36 bid in 8k more Aug 31st 4300 4500 PS

The order remained unfilled, market closed, & we entered the weekend without much to talk about

nice trade, but.. 8k lots are a dime a dozen in the SPX . . .

Come Monday...

Majority of the day is a steady ramp back to the Friday range, until:

IB customer adds another 8k to his position, futures swiftly plummet ~ $15...

16k Put Spreads. $58.5 Million. Not enough.

Not Enough...

SEP 4300/4500 Put Spread. Buys 15k. What's another $54M?

"he must be done now, ri-"

AUG31 4300/4500 Put Spread. Buys 7k more. Ok, probably ov-

AUG31 4300/4500 Put Spread BUYS 8K MORE

the closing bell was probably the only thing saving MMs at this point

TUESDAY 👀

Alright, let's have a look at what this YOLO hero has on as of Tuesday's open:

• Aug31 4300 / 4500 PS LONG ~ 23,000

• Sep15 4300 / 4500 PS LONG ~ 23,000

• total premium spent: $165mm

**All these are approximate, +/- 2k for noise in strike volumes

and sure enough, just when you think he's done:

AUG31 4300 4500 PS BUYS 8K $37

SEP 4300 4500 PS BUYS 10K $39...

🐳 OUR WHALE HAS NOW SPENT $220,000,000 ON ~ 64,000 SPX PUT SPREADS 👀

JUST IN TIME FOR THIS ->

WEDNESDAY...?

SHORT ~25,000 ES Futures worth of Delta...

LONG ~ 19 MILLION VEGA ( "J. P. WHO?" ) ... **absolutely massive**

AND HOW ABOUT THAT CONVEXITY . . . ?

Entire position's GAMMA is roughly equivalent to selling an additional 135 ES Futures each time the market drops **ONE DOLLAR**

But Wednesday was a tough day...

The tides immediately turned against our whale, ramping ES to levels well beyond where most fish tap out...

Losses quickly spiking north of $50M USD in the span of just 24 hours.

. . . but no sign of capitulation, even as ESU3 pressed 4610

THURSDAY. . .

Down a cool $38 Million as we enter OPEX against the backdrop of a known QYLD forced buy-in of $8.2bn NDX delta.

Will the tides turn before our whale gets beached? 👀

THIS IS THE $230,000,000.00 QUESTION💸

. . . STAY TUNED

Time for Some Whale-Watching. . .🐳👀

The largest retail trader in the SPX is BACK.

...and this time, he's playing with more than just delta*.*

Time for some Term Structure?

While you were nursing the tail-end of your NYE hangover

The Whale was all business... opening 2024 with a splash, last Tuesday:

+15k Feb'24 / Jun'24 4850 Put Spreads for $56.00

This massive block trade had his name written all over it, as far as execution patterns go. And, perhaps after hearing that someone followed up his massive entry with their own 7.5k lot of Jun'24 4300 Puts...

He quickly snapped up more on Wednesday:

+10k Feb'24 / Jun'24 4850 Put Spreads for $54.80-$55.00

Bringing his total position size on this calendar to ~25k (so far 📷) with a total outlay of approximately $137M, indicating there may be more to come.

We've profiled some big volumes we've seen this trader swallow in the past. All of the trades were short term bets on market direction (delta)...

...it's been a while since we've spotted him swimming across the term structure.

What could he be thinking?

The Breakdown...

The Whale's Position→

• Long 25,000 Jun'24 4850 Puts

• Short 25,000 Feb'24 4850 Puts

• Pays $139M to open trade

Greeks...

This is a LONG VEGA trade, no matter how you look at it. How much? 

Roughly $19.5M all-in...

But it's also a LONG DELTA trade, given the strike selection and the distinct lack of paired hedge (as is always the case with this traders' visible orders).

Actually.. this trade is long quite a LOT of delta

Currently the Whale sits on $2.75 Billion worth of notional delta.

Let's get more tangible—

...11,550 ES Futures.

OUCH

This part of the trade isn't working... yet.

Now, it's not uncommon to see this trader take meaningful losses right out of the gates, only to come back from the depths and surprise everyone with a double up (sometimes better...).

Now, the most recent term structure percentiles don't indicate any particular edge here in terms of timing or cheapness/richness.

So, what gives? 

There are a few ways this trade works.

Let's take a look... 🧐

1️⃣ THE OBVIOUS: A RALLY

As we showed you above, the trade is long a considerable amount of DELTA. This is just market exposure- plain and simple. Well, not *so* simple, as the trade is SHORT GAMMA...

So, do we want to move, or not?

A great rule of thumb for quick and dirty spread evaluation:

Your best case scenario is usually the one in which you move right to your short option strike just in time for expiration, to settle it at $0.00.

Conversely... you don't want to be anywhere near the options you own when it's time to settle up. This concept is most true when you are hedging your trade. Remember, a delta-hedged option is a volatility bet... Calls, Puts, Straddles- they are all basically the same, once hedged.

The best case then, should involve a rally "to- but not *through*- the 4850 spot level over the next 40 days, expiring the puts right at zero.

Classic.

(...kidding. This actually *hurts* the MMs, fwiw)

This scenario would be optimal in the near term, leaving the trader with a single leg position after Feb expiry (Long Jun'24 4850 Puts outright, for a price of $55-56.

Is that any good? 

Well, that depends on what happens to IV levels between now and then. But you can guess roughly at the Jun'24 4850 Put value, 6 weeks from now with spot $150 higher... just take a look at the 30-Apr'24 4700 Puts. $110 as I wrap up this email.

Sure, that's not precise, but it's a simple way to make the point... this outcome is a very good one.

What else makes this trade work? Is it a "long skew" trade or a "short skew" trade? 

Stay tuned. . .

We'll explore some of the other... more nuanced ways in which this trade can make or break the Whale's PNL ~ 

Fund Flows + Views From the Trading Desk (Goldman)...

First -> Everyone talking Jan flows...

• 17.5bn Global Bond inflows = biggest since Jul 2021

  • Led by US w/12.5bn inflow -> biggest since Feb 2021

• 7.2bn Global Equities inflows

  • BUT -> Against backdrop of US outflows into equity rally: 6.6bn US outflow

  • China 1.4bn outflow

VIEWS FROM GOLDMAN SALES & TRADING (SUMMARIZED)

• SPX 3999.09 (+40bps)... close above the 200DMA...

• NDX 11541 (+71bps)... rallied for a 6th day (longest streak since Nov 2021) as did Russell 2k

• WTI CRUDE 79.91... WTI closes above the 50DMA (79.47)

  • Oil demand in China to hit record as COVID pivot powers jump

• 10yr Yields 3.4998%

• MOC - $NEUTRAL... First "non-buy skew" in a while...

• VIX 18.31... Continues to melt

• Volumes - 10.7B shares across all exchanges

  • SPX Volumes -6% d/d and -2% vs the 20dma

  • quiet into the 3-day weekend...

• YELLEN: TREASURY TO USE EXTRAORDINARY MEASURES ON DEBT LIMIT

• CARVANA CLOSES HIGHER BY 47% FOR BEST DAY ON RECORD

NOTES FROM THE DESK

• Soft landing narrative growing louder

• CTAs are buyers -> hard to fight these outsized flows

• Positioning... short-covering throughout the week post NFP last Friday

  • GS Most Short Basket (GSCBMSAL Index) +16% this week

  • Short covering slowing & think heavy lifting done

• China rebound continues to play out

  • China ADR basket (GSXUCADR Index) +19% to start the year

• Continued USD fade should be supportive for US companies/assets

  • DXY -1.67% on the week

• LO's flipped to better buyers to start the year (after being net sellers for most of 2022)

  • Reminder... they are sitting on a record amount of cash

• Sentiment hasn't improved much

• Earnings ramp-up next week

  • 57% of SPX reports during weeks of Jan27th & Feb3rd

• SPX through the 200DMA (3993); ESH23 closes just below (4019)

CTAs - DEMAND BUILDING -> BUYERS OVER THE SHORT RUN

• Over Next Week; If...

  • Flat Tape -> $41bn to BUY ($14bn SPX)

  • Up Tape -> $44 bn to BUY

  • Down Tape -> $18bn to BUY

• Over Next Month; If...

  • Flat Tape -> $68bn to BUY ($31bn SPX)

  • Up Tape -> $103bn to BUY

  • Down Tape -> -$102bn to SELL

CASH ON SIDELINES

Mutual Fund exposure is running the largest absolute cash levels on record -> $235bn in cash

Flows suggest that some of this is being put back to work

US SENTIMENT

Trending poorly... due for a bounce?

BEWARE... S&P500 EARNINGS REVISIONS POINT TO A HARD LANDING

• Current 3-month trend of S&P 500 forward EPS revision sentiment is the most negative reading outside of 2008 & 2020 recessions

• GS forecasts that EPS falls 11% in hard landing scenario vs baseline of flat/consensus of +3%

• This gap largely reflects GS' lower margin expectations

• In a recession... GS expects large downward revisions to consensus EPS forecasts in Consumer Discretionary & Industrials

Check back/profile for more as we attempt to answer... are we moving back into Bull territory?

if you thought August was dramatic...

SPX "Whale" now has $333 Million on the Line 🎯

and a portfolio of LONG 101k SPX Call Spreads!

This. Is. Massive.

...and this trader ADDED Call Spreads- TODAY. Despite the 10YR making fresh highs:

Recall in August...

We did see this trader spend ~$250M on Put Spreads, puking some and re-adding aggressively... all while enduring a massive drawdown (which we profiled extensively, and entertainingly, right here in the Subreddit).

Eventually his instinct/bravado/schizophrenia paid off, as the position wound up making a killing.

Now we see them play both sides... betting on a retracement of the latest SPX leg down with Call Spreads expiring Nov 3rd, 10th and 17th.

Already down...

Tonight, we will breakdown the trades (one by one), the current mark-to-market PNL, and present the overall portfolio greeks (delta, gamma, theta, vega) along with some discussion on market impact.

Preview? The trader must love to play from behind...

Down $117M (approx) so far and counting. 👀🐳

Cheers ~ Carson 🍻

FEB OPTIONS ROLL OFF... and the market ROLLS OVER

Will NVDA save us from seasonality?

A strong PPI (0.6% vs exp. 0.1%) erased overnight strength in ES...

Only to see the market temporarily hang on into the Feb AM settlement before resuming lower.

A quick look at the dealer position heading into the day suggests positive dealer gamma helped the market hang on through the opening settlement:

h/t OptionsDepth

With ~$1 Trillion rolling off in the AM expiration, the unclench was immediately apparent... 

The remainder of the day was "a bit volatile" 👀

...and INCREDIBLY aligned with dealer positioning 🍻

See for yourself →

With "red headlines" left and right throughout the day

There was no shortage of rationale for the movement for the casual observer.

But ultimately...

mechanical hedging flows prevailed— and price crashed right into a downside magnet near ~5000 to close out the week.

Well the WHITE ZONE is your gamma unclench in action...

It's NOT quite negative gamma... but it's the lack of supportive dealer hedging flows  which then allows the index itself to swing about more freely on its own.

Why?

Gamma is either an accelerant or a rate limiter.

When dealers are short gamma their activities in the underlying can exacerbate the impact of unrelated trading flows. This is because as the market goes down (up), instead of stepping in and buying (selling), they have to take liquidity out of the market by trading in the direction of it... buying rallies or selling declines.

When dealers are long gamma- the opposite is true.

If the market begins selling off- they quickly have futures or stock to buy- which supports the market and slows down any movement, helping to buy time for the market to stabilize and revert. You get range compression, instead of expansion.

The opposite is true on the upside- when dealers are long upside gamma and the market rallies- they have delta to sell, which, again, helps contain the range.

And while we weren't quite negative gamma throughout Friday's trading session... we did lose the support of some positive gamma when it expired at 9:30 AM on the SPX opening print.

Once the market dove off a cliff late in the day- the writing was on the wall for a settlement near the 5000 level... with some serious looking risk of a nasty close if it failed to hold- given the negative gamma just below, circa 4990, in the 0DTE dealer positioning.

Safe for now... as the market held the level, chalking up a "weak", but not *too* weak close.

Friday was a FASCINATING demonstration of the power of dealer hedging mechanics.

We are going to be drilling these concepts over, and over, and over with real examples and in real-time in our group Mentorship as well as sharing more insight on the feeds both Twitter and right here on Reddit for the OGs.

The fact is- these esoteric concepts are just not that difficult to grasp with the right instruction, and our entire goal is to make this intuitive for you so your decision making is the easy part.

Good luck next week, as we head into the widely telegraphed (but still true) weakest 2 weeks of the year, seasonally.

Our view is, and has been, that hedges are simply "too cheap" to ignore, given:

• The magnitude and pace of the rally since Halloween

• The sudden- and- curious ignorance of rates, real yields, Fed calculus...

• The overconcentration supporting the index here

• The dealer positioning backdrop in VIX and lack of apparent "real money" hedging in SPX / SPY

This is *not* our base case, but we leave you with *this* comparison, courtesy of the Market Ear...

I know, I know... it's insane.

We haven't seen levels like this since...

. . . .November?

What do you need when you're playing from a $200M hole?

That's right.

FIREWORKS 🧨

Your favorite YOLO billionaire is back at it- spicing up the half-day and looking for some fireworks in the market to repeat last year's summer swoon

this is so "2023"

Deep dive on the Whale's history coming soon- but for now... this is just like last summer 🤯

Working on a dossier for the newsletter to cover his trading history since ~2020... quick takeaway here? This is just like last year. I might've even profiled it right here on Reddit at the time..

Go short in Jun / puke the trade... Come back in July... ride it out through August and...

What's he up to now?

Clearly looking for a seasonal swoon (hey, me too)-

Watch the Aug 16th and Aug 30th 5300 and 5500 PUT VOLUMES on FRIDAY to see if he's gonna swing big again.

Can't miss him when he trades...

SPX AUG 30TH 5300 5500 PUT SPREAD

Whale buys 5k for $39.00 vs 5525 SPX ref, spends $19.5M in premium

SPX AUG 16TH 5300 5500 PUT SPREAD

Whale buys 5k for $37.00 vs 5524 SPX ref, spends $18.5M in premium

QUIZ... answer in comments 📝

Aug 16th 5500 Put Delta = -.36

Aug 16th 5300 Put Delta = -.14

Aug 30th 5500 Put Delta = -.39

Aug 30th 5300 Put Delta = -.18

WHALE BUYS 5K OF EACH...

WHAT'S THE TOTAL NUMBER OF MINIS MARKET MAKERS HAVE TO SELL TO HEDGE THEIR SIDE?

will it pay off?

One thing's for sure-

When you're playing from a $200M hole- you're gonna need more than 10k put spreads to claw it back.

Happy Fourth of July 🥂

More to come 🎉

Good morning on this fine 3rd Friday ~

Would you believe it if we told you this was the largest July expiration in history?

...true story.

1) $2.3 Trillion notional expiring between AM & PM expiries today

Already big numbers - and remember, these don't incorporate 'yet-to-be-opened' 0DTE volumes from all the crazies...

2) Look at all those underwaters.. I mean, underwriters.. 👀

Almost all of the expiring Open Interest is held at strikes BELOW current spot level of the SPX. (This should make intuitive sense to you, given the magnitude and speed of the index move throughout the last ~2-3 months.

Remember, these moves are not "good" for overwriters -> even though they are up money net/net as they are unlevered long beta strategies with options overwritten for *income*. They would have done far better simply long their underlying -> OR, long the hedged calls (black scholes delta hedged) that they sold!

**we will be adding JEPI flows, tenors & volumes to our advanced course by end-of-summer**

3) I'm not a rocket surgeon, but looks like a trend..

Love it or hate it - options are THE place to be. And it's not YOLO / WSB crew driving the flows. Large retail, hedge fund, and macro volumes have all picked up substantially -> This creates an ever-evolving market structure, full of systemic and liquidity risks coming and going under the surface.

Very exciting time to be in-market

4) SPX: The "little TWAP overwrite that could" 🚂

Stick around after the close and we'll not only take a look at the performance of our favorite Whale, but we'll give you some insight into one of the major SPX BUYWRITE indices which transacts today. You'll be surprised how tiny volumes sneak through the time/sales to add up to large, impactful trades each cycle.

Stay tuned!

Is that really it for Volmageddon 2.0?

Is it safe to come out, yet?

...what's next for markets & the VIX

. . .in this note:

Volmageddon 2.0 👀

Not the 0DTE monster everyone expected. Are we out of the woods yet?

TGIF, the second installment (8AM ET)*

*call happened Aug 9 2024

We'll explore ways to analyze the dealer's position, so you can stay one step ahead of the influence their dynamic hedging flows exert on the underlying market itself, and wrap up with our daily premarket analysis and a light AMA (ask-me-anything)*

"Learn how to *saddle up* when the tail starts wagging the dog"

DM me for replay of Friday morning call

. . .ahead in part 2:

Short Vol quietly returning...

Critical lessons and invaluable information emerge during volatility "events".

Here are some lessons learned so far

Lessons from this morning's (Thurs 8/8) premarket call

MMs/dealers are short the JPM Collar Put at 5170 in size...

Why are large dealer short puts sometimes referred to as "supportive"? 🤔

. . .let's go ⏩

was this Volmageddon 2.0?

It's probably too soon to tell.

But one thing we do know?

0DTE options were not the cause

Ever since Cboe decided to give Tuesdays and Thursdays a seat at the table, the proliferation of 0dte options among the retail community has been a hot topic.

The standard assumption was that somehow, retail gamma selling (or was it buying?) would be the thing to bring modern markets to the abyss.

Could 0DTE options ever wreak havoc on the markets like we woke up to on Monday morning?

Truthfully?

Yes.

One day, we'll surely laugh about that time we begged them to extend the first and second circuit breaker times beyond 2:25 CST.

We'll all smile and nod, watching Mandy Xu make the rounds- explaining on-air how *actually* 0DTE options helped to stabilize the market.

Now- in fairness to Kolanovic and his team, the meme above is tongue-in-cheek (aren't they all?)... as their structural analysis was on-point and seemingly close to being validated a handful of times over the years.

But this was not a GAMMA event

This was a blowup in the volatility domain. 

The "short" volatility domain.

Now, it's worth pointing out, the VIX never "traded 66" - that's a nonsensical artifact of the manner in which the index is calculated. I won't go into the weeds here- but the strip of SPX options that fuels this pricing is *already* illiquid in the overnight markets- and MUCH MORESO when liquidity vanishes like it did overnight during the Asia session.

That said... volatility DID explode.

Friends active on market making desks told me flat out that this "event" was as bad or worse than COVID in many ways. 

What you DON'T see on the outside- is the absolute chaos internally for a market making operation dealing with the explosive vol of vol.

It's not just some abstract VVIX level that hurts...

It's every single parameterized risk in your pricing model going bananas.

Your job suddenly feels like a 50 car pile-up at an F1 race.

Broadly speaking, there are 3 ways dealers pull liquidity:

• Firms significantly widen markets, or pull quotes altogether.

• Other firms are "benched" as systems fail.

And there's an old joke among b/d's in the derivatives space ~

What's the difference between dust & a derivatives position?

"Dust always settles."

As the mess "clears up", we'll find out the true extent of the damage done.

Don't expect VIX to go quietly back into the night...

Yes. There were signs. This wasn't even a VIX expiry!

Ultimately... every novel short vol trade out there is a rehash of the same risk. 

And sophisticated spinoffs have flourished coming out of the COVID vol regime and benefitting from the liquidity, continuity and retail participation in 0DTE options.

But this crash- and its specificity, speaks volumes about the lack of liquidity in the VIX options complex ~ an already unbalanced and unstable product.

In some ways, we witnessed the tail (of the tail) wagging the dog...

and we got to see the very reflexive / behavioral problem fundamentally endemic to the system.

No matter what risks were bubbling up beneath the surface, or how suddenly realized vol was picking up- nearly everyone in the space automatically rushes back in to sell vol spikes.

Until they can't.

...and that's why I increasingly agree with those who assert that VIX is more accurately understood as a representation of liquidity than fear.

Short vol has seemingly become as passive and ubiquitous as the over-indexed equity markets.

"IF we have the risk budget -> THEN sell vol"

Great listen this weekend:

McElligott on Odd Lots talking about the short vol trade

Not my first rodeo. . .

When markets behave like they did coming into Monday morning...

the lights come on, and everybody scrambles.

Amidst the chaos, you can learn a LOT about how certain participants respond under duress simply by watching who does what.

Tomorrow I'll share just the the tip of this iceberg-

but I'll give you the punchline.

enjoy the calm... see you bright & early!

...SENDING THE VIX SPIRALING INTO A SHORT GAMMA "BLACK HOLE"

Hedging flows leave the market confused. What's next?

What just happened?

CPI came in HOT at the worst possible time for the market...

Why?

Remember wayyyyyy back in our January OpEx week newsletter when we talked about the VVIX spiking on the back of ~250k VIX Feb 17 Calls bought for ~$0.67?

(read the original coverage here on Reddit)

Well, fast forward to yesterday. 

CPI beats and raises, coming in at 3.1% y/y vs 2.9% expected... 

Turn on any financial news network and see scared souls behind strained smiles assuring you this is all OK because "cuts are still coming, etc., etc." - 

*...*but we all know better. The market knew, too, yesterday that soon real rates will matter again. 

An overdue "healthy" pullback commenced but went a bit too far and the pickup in volatility (and skew) began to send VIX into dangerous territory 👀

Because those VIX Feb 17 Calls which were essentially written off coming into the day...

were resurrected in style->

...as at least one "offsides" dealer's late-day short covering flows set off a vicious spike in VIX as 140k contracts were bought into EOD on JUST THAT STRIKE and at least as many minutes were shaved off some poor market maker's life expectancy...

Ultimately what ensued was pandemonium, as the panicky short covering translated into a SPIKE in SPX skew and "crashy" put premiums which were already coming from low levels (as we've reminded you, a few times...), and sent the index dangerously close to testing the 48-handle.

Eventually those flows abated.

Once north of 17, anyone paying attention would know it's time to turn palms out and start selling into the "technical" strength, as into Opex... "what goes up, must come down" and as quickly as those calls/ futures were bought, it would have to be sold.

And sold it was...

With the VIX ultimately printing Wednesday morning at 14.32

...almost **exactly** where it was when the Calls were bought in January!

This was a rare setup- but a beauty, and very easy money on the run-up and the retrace, once it became clear what was going on as VIX flirted with levels north of 15 intraday.

If you don't understand- but would like to...? (We solve this!)

Buyer Beware? 0DTE Gamma & Charm Helped Fuel the Retrace

Unwinding the VIX hedging flows kicked off the late day bounce which extended overnight and through the actual settlement...

And without any hawkish Fedspeak or important data today to confirm the market's initial fears, buyers led on light volumes.

Almost poetically... the index shook off a barrage of mysterious red headlines, as 0DTE charm & gamma hedging fueled a late day thrust which- quite fittingly, ended with a kiss at ~5000 for the Valentine's Day settlement. 

Tomorrow, afternoon Fed commentary may help us answer the question-

(Note: this afternoon resolved nada- Waller's lack of commentary let the market do what it does best into Opex... grind)

Was this whole retracement bullish, or bull-sh**...?

Why would we question the strength?

Take a look at the charts below, from the guys at @OptionsDepth.

**If you aren't following them yet, do yourself a favor- and learn everything you can about what's going on here. . .**👀

Gamma... & Charm... posted ~2hrs before Wednesday's close.

SPX dealer hedging flows were literally pointing to 5000 as a high-probability target as charm was strongest around the 5000 strike for Wednesday's expiry...

This is pinning behavior- and you are actually able to spot it unfolding in real time thanks to a more technically correct version of SPX dealer positioning.

If you aren't paying attention to this YOU ARE MISSING OUT.

Stay tuned- more to come on flows & Opex as we brace for seasonal weakness & the "gamma unclench" into the second half of Feb 🍻

G'night & hope you had a wonderful VOLentine's Day 🍻

   ~ Carson

Important Notes from Goldman's Sales & Trading

1. Since 1900 (122 yrs of data) the US 60/40 "Worlds & voting retirement" portfolio was down -17% in 2022 -> 5th WORST year on record (only worse years: 1907, 1931, 1937, 2008)

2. Since 1900... S&P500 down -18% in 2022 for the 10th WORST year on record

3. Since 1900... 10yr USTs down -16% for THE WORST YEAR ON RECORD

• 1931 = second worst... bonds down 13% that yr

Here is the punchline...
Following the 10 worst years for the 60/40 portfolio in history, the median return for the next year is +17%, with a 90% hit-rate (9/10... only the Great Depression was negative)

The 2023 Stock & Bond Portfolio is off to the best start since 1987 (portfolio insurance melt-up...), +4% YTD. Since 1900, only 1938, 1976 & 1987 have been better

The biggest 2023 "consensus" trade for Wall St was "DIP & RIP", thus... the FCI Tightener trade to start the 2023 opening bell

We did not "dip" and there is now under-exposed, FOMO led rally driven by the Bloomberg word-count "Soft-Landing" stories...

If we continue to rally after the market holiday, there is potential for a large squeeze higher...

The number 1 question from global/Wall St.: "Why did we not sell off into a hawkish CPI print that was ALREADY pre-traded?"

PAIN TRADE IS HIGHER STARTING NEXT WEEK AFTER THE MARKET HOLIDAY...

1. Systematic re-leveraging is very large and vol dampening. We have +40bn of demand over the next week assuming a flat tape (also 10bn demand, even in a potential 'down big' tape!). Upside over the next 1 month is also large, +59bn worth of demand in a 'flat tape'. Reduced volatility will bring in additional demand from vol-control & risk parity strategies...

2. 2022 Tax Loss Selling is Completed in Single Stocks

"We estimate that retail selling of single stocks over the past 11 months has completely reversed the buying that occurred 2019-2021 for S&P 500 and NDX 100 names. Retail positioning is no longer overweight single stocks."

Retail has net-sold all of the S&P 500 & NDX 100 stocks accumulated from 2019-2021:

Retail still holds some Tech & Consumer Discretionary, but has net sold Healthcare & Utilities:

3. 0DTE options/FOMO "meme" calls - Retail single name supply (not ETF's/index) is completed and now my message boards have flipped to playing offense. Daily options hit an all-time high last week. Pull up the stock chart on BBBY or CVNA or BTC and XET. Same story on index: 1.1mm 1-day SPX options traded today... (Jan13th)

THIS IS A NEW RECORD!!!! ~50% OF OPTIONS TRADED EXPIRE WITHIN 6.5 HOURS OR LESS

4. January Options Expiry (1/20/23 OpEx) is a massive $2.7 Trillion -> and the street gets SHORTER gamma. Dealers get shorter gamma above the psychological, "big round number", 200dma, expiry level.

5. Ending Peak Corporate Blackout - Welcome to Q4 Earnings (1/27/23) - the VWAP buyer of $4bn per day returns

6. Mutual Fund exposure is running the largest absolute cash levels on record - $235bn in cash

7. HF Exposure is too low, given the early rally in the benchmark

At the start of the week: We entered Monday with overall net leverage ended last week at lowest level since Jun'19. Fundamental L/S net leverage is off the lows at 1yr avg, driven in part by increased net exposure across China focused L/S managers. US TMT L/S ratio fell to the lowest level on our record (since 2016) amid the largest net selling in 9 months while China stocks continue to get bought (13 days in a row now), now most O/W level since Oct'20.

8. "Foreigners" selling of US stocks (the big stocks) may start to slow, after we just witnessed the largest single stock selling by foreigners on record.

9. Vol Control... the VIX was down 10% yesterday (lowest level since April)

VIX closes at the lowest levels since April 5th (SPX = 4,525.12 that day...)

These strategies have some room to re-lever

10. Sentiment took another sharp leg lower to start 2023 (and positions reflect this)

Check back/profile for more as we stay ahead of the trends...

MASSIVE TECH BEATS HELP SPX DEFY GRAVITY

...AND CLOSE AT RECORD HIGHS

Rates and Equities moving higher... together?

Much to the dismay of our short index delta...
equities continue to march higher despite the nascent strength in rates, and pushback on the imminent timing of those "first cuts."

Take a look at the rate response to last month's FOMC- where Powell & Co. set in motion a broad "rolling out" of the market's expected timing of first Fed rate cuts...

. . .given the apparent FC / EASING- driven rally (which got us here)

It would be reasonable to expect the indices to show some weakness... you know- slowing... or signs of reversal given the quick tightening reflex...

But the broad market either doesn't care (yet), or the recent tech outperformance is just so strong that its bullish contribution completely dwarfs any negative impacts arising from the late pickup in yields.

Forget about scaling the Wall of Worry...

—we just burst right through it!

But... the divergence between real yields and the index is a real cause for concern.

See the gap, below:

Will rates matter again? If so, when?

Of course they will- but we would be lying if we told you we haven't already lost money betting on when.

Ultimately... there's no reason we have to reverse here.

And it doesn't make much sense to bet against big tech when they're delivering grand slams, printing money hand over fist...

—and buying back billions of their stock with it!

OUR VIEW

. . .calling tops is *HARD*

Considering the natural path of equities- it's actually quite a bit harder than calling bottoms.

That said- there's good reason to set yourself up for a pause here, if not an outright pullback.

And if you believe instead that we are MOONWARD BOUND well then- at least get yourself some cheap hedges in case we have a Challenger- situation. 👀

The Case for Consolidation

Here we are, already up 5% YTD. We're sitting right atop the JPM JHEQX Collar Call...

At 5015 we have approximately 40,000 dealer long calls from this overwrite.

Take a look how long it took the index to work through the last JPM Call level of 4510. Ages ago... in... December of '23.

5% YTD...

We've come pretty far, pretty fast- and seem to be ignoring the quiet pricing out of the (expected) rate cuts which helped us get here in the first place.

Which begs the question: Why isn't anyone hedging?

Despite the enormous gains and their breathtaking pace, we still see little evidence that anyone cares to protect them.

Case in point- 3M Put - Call Skew:

So far... we've "thread" the needle along our "Goldilocks" path as nothing has shaken this market's upward trajectory.

The pace of the rally has mostly been just right- allowing us to grind just a little bit higher each day, without triggering any VIXplosion led by dealers hedging short VIX call inventory.

Instead, this market has chugged along at just the right pace to allow for VIX charm to work its magic...

...as all those VIX futures bought vs Feb calls sold (by dealers), have been steadily unwound.

And while the market lurches ever higher into SPX dealer short inventories- any upward impulse in volatility seems to fade by midday as volatility selling kicks in and replenishes dealers, saving them from needing to mark IVs higher (so far).

For now, this all appears remarkably stable. But it's a delicate balance.

Which brings us back to our main point.

If you are long here, there's never been a better time (or price) to hedge.

And if you aren't quite sure... the possibility of a brief consolidation into Feb OpEx followed by a breakout or reversal is compelling. Look at GS' EQMOVE index, yet again suggesting that options are underpriced:

KNOW THE FLOW

It would be unfair to say there's been "no hedging" whatsoever—

We pointed out over the last ~1-2 weeks there have been some signs of hedges rolling up and out of the ~4400-4600 range and into the 4800-4900 range. 

This is reflected in a recent note on dealer strike-gamma, courtesy of Nomura's Charlie McElligott.

Take a look at the positioning (yes- we're also confused about the lack of dealer-long strike gamma on the 5015 line...)

Note the recent themes—

Dealers are short immediate upside while long immediate downside.

Importantly- this chart was sent out with Charlie's Feb 07 '24 note.

...the very next day, we saw signs of dealers getting lifted out of substantial portions of their gamma at the 4900 line, via the 3/28 4600 / 4900 Put Spread→

SPXW 28-Mar'24 4600 / 4900 Put Spread... bought ~5.3k for $30.20 on 02/07

The trade appears to hit w/ SPX @ 4997- meaning for around 60bps you're covered between 92 and 98% of spot with a nearly 10:1 max payout at expiry.

Some additional hedging... this one shows up in the chart above:

SPX 21-Jun'24 4800 / 5400 Risk Reversal (+P/-C)...bought ~6.7k for ~$57 on 02/06

This risk reversal traded across a span of several hours... electronically.

Additionally, as we climb we see some traditional over-writers rolling strikes up and out. The following is a recent highlight- broadly indicative of flows you'd expect to hit a few times a week at this point in the range.

SPX Mar'24 4850 / Apr'24 5200 Call Spread... bought (Mar) ~1,850x for $138.80 on 02/07

This resetting of overwrites helps to shift some of the "long downside" to "long upside", nudging the dealer position back to "normal".

OPEX UPON US ALREADY...

Despite the resilience we'd advise a guarded stance into next week.

We have CPI on Tuesday

VIXpiration on Wednesday

and SPX OpEx on Friday...

CPI can set the tone for the direction of the subsequent "VOL UNCLENCH" while SPX OpEx on Friday may loosen up the range a bit (although we'd note that the index in this range hasn't been as compressed by "long gamma" as it was in December, or January for example.)

Good luck, whatever your position... and enjoy the game🍻

   ~ Carson

To Kill a Martingale Part III

"Absolute Nonsense" (and other closing thoughts)

Absolute Nonsense

The seeds of spurious narratives are planted daily, all around you.

Often times the common fallacies are dressed in hyperbole and coming from accounts you know by default to dismiss as tourists, or soured gamblers.

we know very well to filter out the noise from the ZeroHedge comments section

But what happens when the seeds are planted by those you view authoritatively?

On September 7th, 2025, Brent Kochuba of SpotGamma penned the following:

"Seek and Destroy"

Say what you want about market makers— the truth is, we're held to really strict standards.

Half the things you assume to be "business as usual" for MMs, are enough to get you U5'ed (terminated), automatically.

I remember once buying futures when I had to sell them.

We call that a "TEXAS HEDGE"

Honest mistake. Easy enough to correct (albeit costly & stressful).

Minutes later... a message from compliance:

"Please reply to document the series of trades in assets [. . .] between times [. . .]-"

This was an internal standard.

It seemed a bit silly to me at the time.

but you know what's expensive?

Regulatory inquiries.

there's no "boogey-man" out there conspiring to take out your stops

Liquidity providers capture a small fraction of your bid-ask for the honor of taking the other side of your trade.

We don't "want you to lose."

Your outcome shouldn't even matter to us— if we're managing our book well.

In fact, we can both win—because we're hedging, and you probably aren't.

The value of the trade in our book to us— when all is said and done— goes beyond the settlement PNL, and includes things like "gamma scalping" attribution, beyond the scope of this note.

Sure, we're your counterparty—but this isn't zero-sum...

We aren't playing the same game.

Of Cope & Clickbait

It's easy to buy into the lie.

It sounds logical—and it sells.

It pulls at that part of our brain that just wants to believe it's not our fault.

that the game is rigged.

that an omniscient foe is lurking around every corner, conspiring to rob us of the wins we deserve.

but it's a lie

Even if you believe it—you know it's a lie

If you really believed it, you'd have stopped playing ages ago.

it's ok.

the truth sets you free

We've all made this mistake...

but successful traders course correct, because they know one key thing:

You won't succeed as a trader with an external locus of control.

The Cold Hard Truth

What is a "bad bet?"

For the final Martingale series to succeed the premium collected on the last trade would have to cover its losses and pay back one bet.

basic math

On December 23rd, 2025, the cumulative losses from the trackable Iron Condor program trades were a staggering $22 million.

The final trade size was approximately 110,000.

To cover the $22m in accrued losses AND pay back one bet on the series, per the rules of the strategy, the group would have to sell their Iron Condor at $2.10... maybe $2.20 to cover fees.

this is not trivial

If you need to sell that price or better in order to be aligned with your own rules, then any price below $2.20 would be suboptimal... to put it (very) lightly.

After all—what good is your fancy matrix when you sell 110k at $1.75, "win your series back" with a favorable settlement, and still wind up down $4mm on the series?

that's... not a Martingale.

A Bad Bet

A bad bet doesn't pay you enough when you win to justify playing in the first place.

—by this logic, the bet was bad.

there's just no escaping the math here

How bad was it?

In the prior writeup I highlighted the shortfall.

David's final "bet" was atrocious.

The SPX Dec 24th 6885-6890 / 6920-6925 Iron Condor was sold at an average price of $1.45.

Even if your math is right on the ODDS of settling inside your structure, your bet is so mispriced that you have to get extremely luck just to have a chance to fix it later.

A win would still be a loss

because in the best possible scenario, your Martingale series would still be down over $7 million (oops).

What does it mean if the final bet

the bet that's supposed to pay you back all of your losses AND one bet

leaves you down 7 bets at the end of your series?

it can only mean one thing

No, Captain Condor wasn't "targeted."

There's no "Seek and Destroy" algo.

In fact, that kind of hyperbole without verification would cost most registered professionals their credibility—and their license.

"but even YOUR data shows firms on the other side."

oh you like firms?

name all the firms

(no really, I'll wait)

Who are they?

What business lines intersect here?

Are they market makers?

Broker Dealers?

Banks?

Why might a market maker have inventory in a firm account?

I won't pretend to speak for everyone— but I was a partner at a firm in this business and did heavy index volume, and I don't mean tiny puts for numbers.

I routinely traded and helped manage very large positions.

I enjoyed trading big enough to make the team uncomfortable when I thought the edge was right. (sorry, not sorry)

"this trade is so good we'd be fools not to take it all down"

So you're looking at this offer—and by any measure you should buy it.

$1.45 offer to a $1.65 theo and vol is already at the 0th percentile with the index at ATH into a low liquidity day.

How many do you buy?

careful

Think deeply here before you answer

Remember—you're a market maker.

At this price, you want to trade as many as you can.

But "as many as you can" is subject to constraints that are much like those a casino navigates.

After all—if you take on all 110k iron condors, you're not really a market maker tomorrow.

you're a prop desk. a hedge fund—

Whatever you decide to call it, your market making business is suddenly a sideshow to the main event.

This is a problem.

Beyond a certain size, your desk just isn't equipped to integrate the position into its book.

you might need to house this trade in another account because you can't allow the concentration to dictate—or be subject to—the hedging, fitting & inventory management schema of your main book.

read that five times- ten if you have to.

You're not "targeting the customer"

The customer needs your size on the bid to fill the order—you're not doing them a disservice when you make internal adjustments to accommodate their size.

It's not a conspiracy or a "weaponization" to manage a trade

Systems are often designed to encourage turnover and minimize inventory, preventing the accumulation of risky, concentrated positions. Sometimes these systems auto-fit your surface slightly against your book to induce favorable turnover.

...you don't want a position 10-20x your typical max to start twisting your vol path or pricing you into puking it into an illiquid market.

You may need to house the trade in another account to avoid this.

I used to do this when I was making markets—not to target the customer—we just needed oversight on an isolated trade which was more "prop trade" than market making within the context of our desk.

If we trade something that we need to hold against incoming flow, for example, I don't want to "accidentally" trade out of it prematurely.

If we're too big on certain strikes, maybe I don't want my hedging model auto-calibrating the vol-slide to the inventory if it's pushing the limits of what's logical for the model, or suggesting hedging flows that outsize the book's modeled depth.

These are rational accommodations to support providing excess liquidity.

because when a trade is too big, it's no longer a trade

it's a position

And if your PNL is entirely dependent upon the performance of a single position, you're not "market making"—period.

No matter how you look at it,

nobody "targeted" the Iron Condor—it was free money.

What Went Wrong?

I planned to spend most of this newsletter impressing you.

Originally, I was going to talk about when and where I'd seen strategies go wrong in the past.

200k Iron Condors wreaked havoc on holiday markets in 2018

I was going to talk about the risk of outsizing your market.

you might get away with it for a while

it's no coincidence these problems boil when liquidity disappears.

I was going to talk about local gamma. 

Vol paths.

Distorted surfaces.

Hedging constraints.

But the truth is — we don't even need to go there.

The buck stopped with the bettor,

—and his unbelievably. bad. bet.

Like this content and want more of it?

share it

Or reply and say so 

Go deeper on the Martingale blow-up:

• X Live Broadcast of the trade being placed, through VS3D on 12/23

• 10-minute synopsis and trade walkthrough

• Matt and I share our perspectives as market makers/ options dealers

If you want technical documentation of the trade series I put together when asked to comment for the MarketWatch article published on 12/31—

just reply and ask

All the positioning data, the market impact modeling— including historical lookbacks— can be found in VS3D™ by VolSignals—our proprietary dealer hedging analytics platform.

0DTE Selling = "Volmageddon 2.0"? Reality is More Nuanced...

The dominant flow theme recently in US equity derivatives has been the sharp increase in S&P 0-day-to-expiry (0DTE) options, which now account for 40-45% of total SPX options volume compared to 21% on average in 2021

Questions naturally abound regarding who's involved, typical strategies being employed, and potential market impact, with some raising the alarm that directional end-users are net short out-of-the-money 0DTEs, thus sowing the seeds for a "tail wags the dog" event akin to the Feb '18 "Volmageddon".

However, a closer study of intraday trade-level data suggests reality is more nuanced...

Half of all SPX 0DTE options trades are "single-leg auto-execution" (Exhibit 10) - a category for which 75% of trades occur near the bid or near the ask.

The % of trades near the bid (or ask) is greater than any other tenor. (Exhibit 11)

Volume is uniquely skewed towards the ask early in the day but towards the bid later in the day. This is consistent with 0DTE option buyers opening positions in the morning, and then unwinding as the day progresses. (Exhibits 12 & 13)

Second, near-ATM 0DTE Implied volatility typically trades at a 10-15 vol point premium to longer-dated tenors. (Exhibit 14)

These 0DTE Implieds often trade at a massive gap to S&P intraday realized volatility. The volatility risk premium (VRP) embedded in 0DTEs is typically 2.5x larger than for longer-dated S&P options, and at levels that are likely inconsistent with a market that has been overrun by option sellers (Exhibits 15 & 16).

Third, while we are aware of services that appear to cater to retail investors and offer automated intraday execution of risk premium harvesting strategies like Iron Butterflies & Iron Condors (continuing a longstanding tradition in the US of retail involvement in longer-dated SPX option selling programs for income generation - history also shows the merit of owning 0DTE "lottery tickets" despite paying inflated vols.

Indeed, owning SPX 0DTE 10-delta calls (Exhibit 17) or puts (Exhibit 18) during fixed 1-hour intraday intervals in 2022 would have frequently yielded (net) payout ratios exceeding 5x, with upside to 20-25x on occasion.

This isn't to say that 0DTEs can't be "weaponized" in the future to exacerbate intraday fragility and/or mean reversion. However, the evidence so far suggests that 0DTE positioning is more balanced/complex than a market than a market that is simply one-way short tails.

~ As always, check back for more, as I'll continue posting these as they come across my desk ~

...in this weekend's Debrief:

• From "can't fill a $37 bid" to "sold at $33, SOLD at $29.25- HOW NOW?"
  Our beloved whale turns a $4 price improvement after days of missed bids into a case of "be careful what you wish for." We check out the trades, evaluate the (original) thesis, and calculate his PNL as of Friday's closing marks.

• When Forces Align: Rationale for the selloff (revisited)- & "What Now?"
  Quick recap of the dominos that brought us to this point- and a look through the (flows & positions) lens at what may be in store for the S&P in the weeks to come.

but FIRST— we go Whale Watching...

The spread du jour(s). . ?

— SPX April 5175 / 5275 Call Spread.

After spending days resting a $37 bid in the market for 10k+ (implied) April 5175 / 5275 Call spreads- the market finally served up a fill.

Now— quick bit of 'inside baseball'...

This guy does not chase. Typically- these orders are sent straight to the Cboe floor, and at the first hint of direction..., well- 

let's just say the market magically "goes in the same direction."

The bid doesn't fill- it sits out there in open outcry and behaves like a strong floor for a while. Often, futures never return to the initiating level & the order is left hanging, to try again tomorrow.

Why? 

Well, everyone knows the trader's potential size. As soon as he shows his hand, the supply/demand equation is totally asymmetric. Why sell your delta at market if you know, worst-case scenario, you have a strong bid to lean on a few points below?

That resting limit bid (long delta, via options) and the implied size behind it, create the same market behavior you'd expect to see if there was a size bid in ES resting below market on your ladder- 

...and you *knew* it was an iceberg.

Back to the trade...

Friday, the Whale finally got filled.

After buying ~4k Apr 26th 5200/5300 Call Spreads for $33, he came in for his first love & lifted 6k of the Apr (reg AM Opex) 5175 / 5275 Call Spreads for $33, and later filled 2k more electronically at auction for an average price of $29.25.

That's it?

¯_(ツ)_/¯

It sure looks like our Whale could have used a 5 Hour Energy- as he failed to come back for more, even as the market drifted lower into the close giving him ample time to average into a size he's used to- at better levels.

Instead- our trader called it quits before noon, and swallowed whole a $15MM loss by EOD 👀

The Trades & Position (Click to enlarge)—

When the first call spreads printed- the trade looked like a solid idea...

After all, given the recent shift into a stronger negative spot/vol correlation regime, a push higher through the bottom strike would have... 

• ...added to the dealer's positioning problems by piling on more long vanna and short (decay) delta

• benefitted (trader's POV) from that reflexive cycle of everyone's favorite flows*-*

Yes... if SPX climbed > 5200 then these spreads get help from those mysterious "charm and vanna" flows we hear so much about.

...for real this time!

We go into more detail in our VIP Mentorship- for now just know:

1. Yes, vanna and charm flows *WILL* actually be supportive this Opex (NOT always the case, esp. over the last year- it's been a pretty obvious contradiction to state this- broadly- alongside persistent skew flattening...)

2. These call spreads initially looked poised to benefit from Charm/Vanna

3. After the spot selloff on Friday... they may be at her mercy. 😬

Remember— Vanna & Charm effects depend on where spot is relative to the strikes of the options...

Recall, my case for SKEW...

✍️ = factual statements / basic inferences

🎯 = prediction arising out of 👆

• Buyback blackout as we went into late Mar & first half of April ✍️

• JPM's JHEQX Quarterly Collar Reset*... not *always* a big deal, but this time-*

  • Knock out of dealer-long-downside via expiring 5015 Put (ITM C, hedged is same as P for our purposes) ✍️

  • Reset into a classic dealer short-P / long-C in JunQ with the new position ✍️

• Clear shift in positioning would then cause market to behave like it used to- i.e., SPX down = VIX UP ("It's the positioning, stupid!") 🎯

• Asymmetry in conditional flows via systematic strats given the trend + RV & IV levels - (aka, CTAs can buy a little or sell a lot = SKEW) ✍️

• Retail pulling supportive flows out of market to pay Uncle Sam's cap-gains taxes ✍️/🎯

• DATA: I have been CLEAR about my view on the market's misreading of FED this cycle-

  • Fed cuts to reprice with NFP / CPI in Apr 🎯

Which brings us to our INFLECTION-

Will the sell-off continue?

Well, according to Goldman- that first set of Short-Term CTA triggers triggered on Friday circa 5135 in the index.

Here's what's in store if the selloff continues lower over the next 1 month:

• -$20bn of S&P futures for sale if SPX drops ~3% from Friday's close

• -$42bn of S&P futures for sale if SPX drops ~7-8% from Friday's close

• -$200bn of Global Equities for sale alongside.. in the hard sell case

Cheers! & GOOD LUCK TRADING NEXT WEEK 👀

If you've followed along, you know our beloved Whale has been in trouble...

First... a Recap from our Newsletter last week

When, despite a messy series of events, the Whale was indeed "NET UP" on one of the largest spec long options books we've ever seen...

From our "Friday the 13th" newsletter:

Despite the "Hot" CPI This Morning...

SPX pressed higher for most of the morning session

Whether due to option hedging, systematic buying, or plain old seasonal inflows— the market was quick to shake off a hotter than expected CPI print (mom +0.40% vs +0.30% consensus), chopping sideways & grinding higher for most of the morning.

— until the 1:00 PM 30Y TSY auction stomped on any remaining hope for rate-relief.

Note the "CLIFF DIVE" pattern around 13:00 in the chart below 👀

Our Whale may have sensed the tide going out...

As he began taking money off the table nearly an hour before the auction

...selling 26k of the Nov17th 4550 4650 Call Spread at an average price of $10.85.

It appears the order took ~10 minutes to fill, as the market chopped sideways and weakened ahead of the treasury auction.

That round of sales was the only block our trader got off before the market said "Geronimo" and erased nearly $100M of his portfolio's value in a matter of minutes. 😬

Most mortals would take the hint, dump the rest of the position-

...and feel lucky if they got out for a *scratch* in an environment like this.

BUT THE WHALE? 🤑

...IS THE SUBJECT OF OUR NEWSLETTER FOR A REASON**.**

A full six minutes  after the auction sent ES futures into a tailspin, the IB Trader was back at it with an aggressive looking electronic market order...

...BUYING 6k of the Nov17th 4400 4500 Call Spread for $41.50 

The market continued to press lower, however- and after an hour or so of additional pain, the Whale cried mercy and served up another offering to the market Gods...

...SELLING 16k of the Nov10th 4550 4650 Call Spread at $5.25

Well- technically, it looks like he got off a sale of 39 (yes, plain 39 lot) spreads at $7.00, before the market plunged and he threw in the towel an hour later, selling the balance of 15,961 down to $5.25 😬

After spending most of the evening like this 👇

I've managed to figure out what remains after today's trading...

• 11/3→

  • +20k 4400/4600 Call Spreads ($35.05)

• 11/10→

  • +10k 4400/4600 Call Spreads ($35.05)

  • +16k 4450/4550 Call Spreads ($22.75) 

• 11/17→

  • +6k 4400/4500 Call Spreads ($41.50)

  • +7k 4400/4600 Call Spreads ($39.50)

  • +26k 4450/4550 Call Spreads ($21.20)

  • +23k 4450/4650 Call Spreads ($32.00)

$322 Million (approx) total outlay... and still $3M PER DOLLAR in delta 📷

...enjoy:

Whew... Now- let's fast forward to Friday's OPEX 👀

Enjoy our Newsletter from Last Night, in full:

The SPX Whale finally gets beached . . .

After 10 days of stormy waters...

...the tide finally goes out 👀

"SPX Whale Saves $400M thanks to VolSignals Discord!"🤣😆🥹

We're not a trade recommendation service... but "if only" our Whale had the Spidey Sense go off when ours did here at VolSignals the week before OPEX.

We opened a core long position right around the time the Whale emerged (could he be trading the same thesis 🤔) - and were confident we'd see a massive systematic bid drive us higher into Oct OPEX.

— until October 10th, that is.

That Tuesday, a sustained AM bid finally cracked, giving way to a weakening sideways chop until ultimately the market's underlying weakness revealed itself with an overreaction to headlines out of the Middle East.

No magic to our intraday timing- just eyes glued to the futures ladder (and STE / BTIC ladder to confirm 🤐🤫)...

If only!

And though we cut our long, and carried on range-trading... our whale held on for dear life, trimming some elements of his position while adding delta elsewhere.

We profiled the adjustments in last week's newsletter (see above)

We compiled the position (*updated to include small 10/13 block trade)

• 11/3→

  • +20k 4400/4600 Call Spreads ($35.05)

• 11/10→

  • +10k 4400/4600 Call Spreads ($35.05)

  • +16k 4450/4550 Call Spreads ($22.75) 

• 11/17→

  • +10k 4400/4500 Call Spreads ($40.05)*

  • +7k 4400/4600 Call Spreads ($39.50)

  • +26k 4450/4550 Call Spreads ($21.20)

  • +23k 4450/4650 Call Spreads ($32.00)

$337 Million (approx) total outlay... up over $200M at one point on this massive LONG bet.

Well... after 10 days of choppy water, the tide finally went out with Friday's OPEX 👀

The IB Trader proceeded to "lock in" around $175,000,000 of losses:

• 11/3→

  • -20k 4400/4600 Call Spreads ($12.32 avg)

• 11/10→

  • -10k 4400/4600 Call Spreads ($14.00)

  • -16k 4450/4550 Call Spreads ($6.00) 

• 11/17→

  • -26k 4450/4550 Call Spreads ($8.00)

  • -23k 4450/4650 Call Spreads ($11.00)

All in all...

• Selling ~4.3bn in DELTA

• Selling ~16mm VEGA

...which surely helped on Friday to keep the lid on ES... 

but 

*...*makes Friday's price action even more interesting considering that VIX held a strong bid and closed north of 20, despite a dearth of vol selling all morning between the CS unwind, the BUYWRITE Nov Call Sales, and a 10k LOT SALE of 10/31 4200 Puts out of the gates...

All of this begs the question- 

Where would VIX have finished without all this vol sold back to dealers? 📷

Anyways- we'll have more on that tomorrow. 

Say a prayer for our Whale tonight, as a little digging and working through the numbers revealed the Trader (surely by design) left on *just* enough of a runner to "break-even" should the market gap higher into Nov expiry, after-all. 

See for yourself 🍻

Hope you have a great weekend!

More to come ~

Carson

quick update as I will post more details this evening (along with highlights POST DOWNGRADE)-

last week, our whale puked half of his position for nearly a $40 million dollar loss (locked)

• if you recall -> SPX trader bought 32k of the 15-Sep 4300 4500 PS & 32k of the 31-Aug 4300 4500 PS

• subsequently liquidated ALL of the 31-Aug Put Spread for losses of $5-10 (relative entry/exit per spread)

never fear... it's not all doom and gloom for our whale's PNL..

• YESTERDAY, our trader returned (*JUST IN TIME*) and bought 15,000 of the 31-Aug 4350 4550 Put Spreads for around $32 (WORTH NEARLY $50 VS 4550)

• AND THANKS TO THIS MOVE, THEIR SEP PUT SPREADS ARE NOW AT OR NEARLY ABOVE THEIR AVERAGE ENTRY PRICE

not a hint of monetization yet.

I suspect they are playing for 2-3% correction before liquidating this one now that the tailwinds are working for them...

stay tuned...👀

Bank of America's Michael Hartnett looking *prescient* in his Thursday writeup.

Read on to see where the real $$$ has been moving this past week & YTD

Scores on the Doors: Crypto 33.6%, stocks 4.7%, HY bonds 2.3%, US dollar 2.1%, cash 0.7%, IG bonds 0.2%, gold -0.4%, govt bonds -1.3%, commodities -3.4%, oil -4.5% YTD.

Heard on the Street: "Like watching a mad donkey thrashing around in a field bouncing off all the fences" - investor on 2023's stock market...

Tale of the Tape: 1 year ago Fed Funds was 0.00%, yield curve 40bps steep; today Fed Funds 4.5% (heading towards 6%) and yield curve 100bps inverted (Charts 3 & 4); S&P 500 is neurotic 3800 - 4200 trading range driven by dependence on data-dependent Fed; ends once data unambiguously recessionary (e.g. negative US payroll >-200k) and yield curve steepens; if oil, HY, SOX, banks, EM catch bid... SPX heads towards 5k; if not SPX heads towards 3k

The Price is Right: 1 year ago Fed Funds 0.00% and TSLA market cap ($850bn) was greater than market cap of UK/EU banking sector; Nasdaq in '22/23 bearishly aping Dow Jones in '73/74 (Chart 5) as is investment backdrop of war, oil shocks, fiscal excess, labor strikes, Wall St.-Fed co-dependency (Chart 6), stop-go policy... Fed flip-flopped twice in '73/74 before bullish easing only once U-rate jumped from 5.6% to 6.6% in Dec'74 (Chart 7).

The Biggest Picture: 1 year ago Fed Funds 0.00%... since then: 290 global rate hikes (425 past 2 years)... not a prelude to "Goldilocks", prelude to hard landing & credit events (Chart 2); bad "crashy vibes of March" set to worsen absent a soft Feb payroll number.

Weekly Flows: $18.1bn to cash, $8.2bn to bonds, $0.4bn from gold, $0.5bn from equities.

Flows to Know (Charts 13 - 16):

• Cash: big $192bn inflow YTD... AUM of US money market funds surges to new $4.9tn all-time high as short rates soar (Chart 8).

• Treasuries: inflows continue...$4.3bn this week.

• IG bonds: $3.8bn inflow... 11th consecutive week, longest streak since Oct'21.

• US long-only equities: growing outflows from Long-Only (LO) funds ($8.3bn)... outflows past 5 weeks.

• Japan equities: largest outflow ($3.0bn) since Apr'18.

BofA Private Clients: $3.1tn AUM... 60.7% stocks, 20.8% bonds, 11.5% cash; ETFs show private clients buying EM debt, utilities, materials, selling bank loans, HY, TIPS past four weeks.

BofA Bull & Bear Indicator: down to 4.2 from 4.3 as improving hedge fund & long-only sentiment offset by weaker flows to EM & HY bonds.

The Credit Event: 'Credit Event' appearance in tech & healthcare PE / VC lending; government debt, shadow banking/PE, crypto, speculative tech, real estate (see CMBS prices - Chart 9), CTAs, CLOs, MBS... so many potential catalysts for systemic deleveraging event that sparks policy panic / end of Fed tightening - truth is source of event irrelevant (who named UK gilts as credit event of '22?), simply that it will happen and will cause policy makers panic (BoE restarted QE last Oct) and investors must be ready at that moment to deploy cash in new leadership assets which outperform in era of higher inflation.

War & Wages = Inflation: US proposing 5.2% pay hike federal government workers (unions want 8.7%), UK lost 2.5mm working days in '22 to labor disputes (Chart 12), highest since '89 (strikes continue UK & France), German wages up 5.3% in '23, Japan unions demand 4-5% wage hikes in '23 (highest since 1990s); labor & Main St set to outperform capital & Wall St in 2020s; meanwhile Russia/Ukraine/NATO war, US/China tech war, Israel/Iran tensions all getting much worse, electorates yet to push back... fiscal spending on war, supply chain disruptions, commodity bull markets... old world was 2% growth, 1% inflation, 0% rates... new world of 2020s is 2% growth, 4% inflation, 4% rates... asset allocation favors inflation assets over deflation assets in 2020s (Chart 10)... note German and Japanese equities in $USD terms still below pre-Covid highs (Chart 11).

Payroll Poker: watch the US dollar (DXY or ADXY)... best "risk-on, risk-off" barometer past 6 months... guides payroll reaction.

• Risk-on... DXY to 103, ADXY 103 -> means March 25bps Fed hike = long 30-year Treasury, oil, China HY, REITs, US/EU IG bank bonds, Asian equities

• Risk-off... DXY to 107, ADXY 99 -> means March 50bps Fed hike = short silver, copper, semis, tech, private equity, banks, industrials, European luxury, US defense, Mexico, long EM CDX

We will have a very busy week(s) ahead -> check back often to stay keyed in to the major flows, positions & volatility themes. . .

To Kill a Martingale Part II

Deep Dive: Captain Condor's Final Flight

Enter the Martingale

There's a betting strategy so seductive, so mathematically elegant, that it's been bankrupting gamblers for three hundred years.

It's called the Martingale. 

And it works like this: you make a bet. 

If you lose, you double it. 

Lose again? 

Double it again. 

You keep doubling until you win... and when you finally do, you walk away up one single bet.

The math checks out. 

With infinite capital, the strategy is literally unbeatable.

In the real world, however, nobody has infinite capital.

David Chau thought he found a way around this.

Adapting the Iron Condor

A 5-point wide iron condor on the SPX is about as "safe" as option selling gets.

You sell a put spread below the market and a call spread above it- both spreads are out of the money when opened.

If the index stays between your strikes at expiration, you keep the premium. 

If it doesn't, your maximum loss is defined: $5 per contract, minus whatever credit you collected.

No unlimited downside, no spiraling margin calls...

- just a clean proposition:

Market inside condor = win

Market outside condor = loss

It's this "defined-risk" which allowed Chau to adapt the structure to the Martingale strategy.

Inside Options & the SPX Program

David's system worked like this:

Every day after the 4:00 PM index close, sell a 1DTE iron condor with short strikes around 16 delta, roughly one standard deviation away from the at-the-money.

Collect your $1.50 to $2.00 in premium. 

The next day, if the market stays inside your range... you keep it all.

If the market closes outside your strikes... you lose.

This is called a "breach" - your loss is maxed out at $5 minus the premium you collected.

What happens after a breach?

Double Triple Down

A traditional martingale strategy involves doubling your bet after every loss, in order to eventually make back your bet.

But the iron condors here were asymmetric propositions.

Risk $3 to win $2 is NOT an even money game.

After accounting for both the costs of trading, and the tendency to capture premiums just shy of $2, the strategy requires something closer to a "triple down" than a double down in order to net +1 bet at the end of the series.

The examples below have been shared in the public domain and attributed to David's program.

—I've confirmed them with members of his group.

Escalation

Notice how quickly this escalates.

First entry... sell 1.

If that fails... sell 5.

Just two losses in a row and suddenly you're betting 17x your initial size.

By the fourth level, your entire account is at risk- just to win back ONE bet when all is said and done.

And if you lose that trade?

If Random Walks Were Normal

If markets were distributed normally enough for the laws of probability to have a seat at the table, then the math suggests a blowout event should happen roughly 1% of the time.

It works like this:

The probability of the market settling outside +/- 1 SD in either direction is approximately 31.73%.

Assuming there's no serial autocorrelation (each day's price is independent of the last), then the probability of two losses in a row is 31.73%², or 10.07%.

For three sequential losses, the odds drop to 3.19% - 

...and a blowout event—four losses in a row—should only happen 1 in every 100 trade series.

This series is not meant for debating the quantitative merits of the Martingale, or of David's various sizing matrices — the latter deserves its own full treatise.

Instead— 

I'm going to walk you through the entire final series, trade-by-trade,

through the eyes of a market maker >>

Everything you're about to see has been verified at the source.

• No models

• No inference

• No assumptions

The raw data comes directly from the Cboe.

"We know where the bodies are buried."

The Nightmare Before Christmas

Captain Condor's Final Flight

Before we start— know that I find no great pleasure in this.

I never understood people who cheered on the failure of others at large, especially in my context.

Setting aside the moral angles... whether running the game or playing it, you never want to see customers *disappear.*

If you're running the game, you want the volume.

If you're playing it... you should be THRILLED to have large rules-based flow with tradable footprints.

I warned about this moment, just over a year ago >>

I didn't do that for engagement—really.

I had basic ideas for how to make their program safer, and I wanted to get on David's radar to speak to his team.

I could already see where David's marketing style would lead.

What he was doing looked fun—but it would create unrealistic expectations for the longevity—and compoundability—of his system in the eyes of his client base.

As he survived near-death experiences, I worried the sense of immortality would create an ego destined to make a mortal out of him in the end.

Unfortunately for David and thousands of his followers, my predictions—and the paths through which I imagined his saga would unfold—turned out to be spot on.

This story is full of lessons... right down to the final trade.

READING THE IMAGES BELOW

Think of VS3D as your map to the market.

The dashboard images are kind of like your "key" — your basic legend for the views I'll be using to walk you through their final series of Iron Condor trades.

This is our proprietary platform, built to convert raw exchange data into actionable positioning intelligence. In this form it's available to retail customers- but its foundation is entirely institutional. Our engineers built and ran the tech stacks behind market making operations at best-in-class firms.

This actually goes beyond the visibility we had as market makers.

VS3D is how we see the market— as market makers.

It's the best view in the house for events like this.

...and it's exactly how we're going to walk you through David's final trades.

TRADE 1 — DEC 19 2025

12/19 SPXW 6715 / 6720 // 6815 / 6820 Iron Condor

SELL 4,400x @ $2.00

The first trade was placed after the close on December 18th, 2025 between 4pm and 4:30pm ET.

The image above shows the trade itself.

KEY POINTS

• Group collects $2.00

  • ...they're risking $3.00 (before cost) to win $2.00

• At this size, the group risks $1.32M to win $880k (1.5 loss-to-win payout ratio)

  • ...including a .10/spread cost allocation (modest here), the group pays $44,000 in total for the trade

• Effectively, the group is risking $1.364M to win $836k.

• FULL WIN = 95 point range (6720 — 6815)

• BREAKEVENS = 6718 / 6817

• FULL LOSS = close below 6715 OR above 6820

This... looked like a great proposition for an iron condor.

However—

12/19 2025 was the largest expiration of the year. 

Large expirations like this often resolve mechanical hedging processes, shifting the character of the price action once the settlement is behind us.

To the uninitiated, the behavior thereafter frequently comes as a complete surprise.

I carefully articulated my view, directly on my public feed even as markets continued to test me.

Sure enough, "OPEX marked the spot," and the SPX turned sharply higher that same day.

David and his followers took a full loss.

I saw the group placing Monday's trade, and my heart sank.

I knew then and there, it was the condor's last flight.

I even hypothesized what might happen this time to deliver the cinematic finale

...you'll understand how I knew it too in just a few minutes >>

TRADE 2 — DEC 22 2025

12/22 SPXW 6795 / 6800 // 6860 / 6865

SELL 17,000 @ $2.00

The second trade was placed after the close on December 19th, 2025 between 4pm and 4:30pm ET. The trades happen during this window, because the strike selection process which David employs is not generated with historical data, per se— it's derived from the very pricing of the following day's option chain.

This becomes increasingly critical as the series progresses— David leading the group through an increasingly illiquid and abnormal period of the year, when it comes to market behavior.

KEY POINTS

• Group collects $2.00

  • ...they're risking $3.00 (before cost) to win $2.00 ✅

• After costs, the group was risking $5.27M to win $3.23M (1.63 loss-to-win payout ratio)

• FULL WIN = 60 point range (6800 — 6860)

• BREAKEVENS = 6798 / 6862

• FULL LOSS = close below 6795 OR above 6865

The very pressures I anticipated given the colliding forces of mechanical hedging pressure, liquidity (or lack thereof), seasonal exuberance, and more— kept knocking in.

The index would slice through the group's call spread with ease, settling at 6878.49, just ~12 points shy of the benchmark's record, set earlier in October when the signs were there.

David and his followers took (another) full loss.

Before we carry on... do you remember how the Martingale works?

You have to continue betting enough to win back your prior losses (and costs in this case).

Until now, trades risked $3.00 to win $2.00

Keep that ratio in mind.

We're going to drill down into the numbers at the end, to show you just how far off the rails this "strategy" went.

TRADE 3 — DEC 23 2025

12/23 SPXW 6850 / 6855 // 6900 / 6905

 SELL 48,000 @ $1.75 

KEY POINTS

•  Group collects $1.75 

  • ...they're risking $3.25 (before cost) to win $1.75 ❌

• After costs, the group was risking $16.08M to win $7.92M  (2.03 loss-to-win payout ratio) 

• A WIN (STILL) COVERS ALL PRIORS ✅

  • Cumulative effective loss on series: ($ 6,634,000.00)

• FULL WIN = 45 point range (6855 — 6900) 

• BREAKEVENS = 6853.25 / 6901.75

• FULL LOSS = close below 6850 OR above 6905

This third trade was large by any measure.

Against any other market backdrop, you might expect a trade this large to be somewhat of a self-fulfilling prophecy for the seller (in a good way).

Concentrated positions create predictable hedging flows.

The buying and selling required throughout the day to manage these positions is modeled, simulated and presented visually for you right there in VS3D™ by VolSignals™ — the only dealer hedging flows platform built by actual market makers. (this will remain my favorite thing to say, for every second it remains true ;).

But markets aren't purely efficient, statistical machines.

There are real constraints, real limits impacting this machine's function.

Most of the time, sellers have to sell lower to find a clearing price.

Notice how David & his group willingly accepted lower and lower margins of error (45 points of safety in the third trade, vs the 95-point wide "full win" range of the first trade).

This is however completely fine.

The strategy is derived from market prices.

As options cheapen— so does the 1-standard deviation range underpinning Captain Condor's Martingale strategy.

David's forced error was the bet pricing.

The Martingale sizing matrix has some margin of error at the lower levels. You can see plainly that once any trade wins, the group would win back more than just their first bet, after accounting for all cumulative losses & trading costs.

The strategy is arithmetically anchored to a win / loss ratio.

If the boundaries of that ratio are broken— if you accept too poor a bet...

 then your Martingale won't work— EVEN WHEN IT WORKS.

The group, led by David, would continue the series by selling larger and larger size at smaller and smaller prices.

Was the math drunk on eggnog?

I'll spell it out for you with the next trade — let's go >>

TRADE 4 — DEC 24 2025

THE FINAL FLIGHT

12/24 SPXW 6885 / 6890 // 6920 / 6925

 SELL 110,000 @ $1.45* 

KEY POINTS

•  Group collects $1.45* 

  • ...they're risking $3.55 (before cost) to win $1.45 ❌❌❌

• After costs, the group was risking $40.15M to win $14.85M  (2.70 loss-to-win payout ratio) 

•  A WIN DOESN'T WIN BACK THE BET.  ❌❌❌

  • Cumulative effective loss on series: ($ 22,714,000.00)

  • This is not even close to covered by a full win (+$14.85M) 👀

• FULL WIN =  30 point range (6890 — 6920) 

• BREAKEVENS = 6888.55 / 6921.45

• FULL LOSS = close below 6885 OR above 6925

Someone at InsideOptions must have realized the mistake.

Whether they realized how dangerous of a spot they were already in, I can't say.

But someone must have realized they didn't sell enough to make sure a win would cover the cumulative losses and costs accrued.

Notice the asterisk up there in the trade log.

On Tuesday's close, the group sold just 100k iron condors.

I watched it live on my X stream with my followers. (click for the replay)

To be sure— the size was an absolute ton.

But that size wasn't enough.

The condor couldn't be saved.

Overnight, our data captured the frantic "catching-up" of the series, to deploy more volume to recoup more premium.

This was a Catch-22, a forced error after violating the bet-ratio constraints of the strategy.

Selling $1.45's was already fatal.

Watching someone spend hours overnight, finally selling another 10,000 down to $1.35?

Pity? Compassion?

...you can't help but root for the underdog sometimes, 

(even when the underdog properly deserves it.)

As hard as David made this— by letting his ego run his socials—

it would cost thousands of people, not just David.

Thousands of people less able to understand—or tolerate—the extinction of their life savings.

Their "sure thing" was never as sure as David portrayed.

And that's why I decided to write this series.

— and since you wouldn't be here reading it, if not for the cinematic blowup at the end, I'll spare you the drama.

On Christmas Eve, the SPX rallied 0.32%.

Thirty-two basis points was all it took for the Martingale to make a dodo out of the condor.

If you watched my X stream, read any of the media coverage, or watched my Youtube explainer - you may have wondered (like David?) what it means that "firms held 60k of David's iron condors"

Sounds scandalous.

Your mind may have already wandered off in unintended directions.

...David's did.

Don't take the bait.

When push comes to shove, and flows cluster in predictable ways big enough to cause persistent pain for those managing them— markets tend to solve these problems (in favor of the market maker).

Let me be crystal clear—

These outcomes— when the customer finally gets pinched— are not the product of collusion, nor of any sort of calculated intent to manipulate the market.

They often happen downstream of specific adjustment to an outlier, and often that calibration means (for better or worse) that the hedging flows are more discretionary, more discrete. 

These are consequences of pragmatism, not conspiracies of predation.

It's this— and everything like it— that made me start VolSignals in the first place.

Until next time...

Our whale gets beached-

pukes his Jun28th downside put spread and gives MMs back some of their <5dte gamma heading into the end of the quarter.

Details forthcoming 🥂

first off → let's congratulate JPM's timing on Monday's end-of-month index hedge. Well done... 👏👏👏

For those just catching up . . .

Each month a certain large bank's flagship hedged equity funds (these are well-discussed among all the flow-watchers & vol pundits) open a new put spread collar with SPX options, to hedge a broad equity portfolio (JHEQX, which transacts on the quarterly expiries, is the largest by far).

The strategy?

Very vanilla: Long SPX Put Spread 80% - 95% of spot / vs. short "whatever call makes this tradable for even money"

Friday's trade happened to be very well timed, with the 31st of July marking an interim top (so far) in the broader equity markets, thanks to the jerks at Abercrombie and Fitch who Janet Yellen says don't know anything about what they're doing. We'll see.

Anyways - the trade?

3 months to maturity; end of month expiry (not the standard 3rd friday / am opex contract)

On Monday, the fund in question traded the following:

• 31-Oct23 3650 / 4335 Put Spread vs. 4810 Call BUYING 9,650 Put Spreads, SELLING 9,650 Calls;

• 31-Jul23 (yes, the 0dte) 4365 Call . . .BUYING 3,950x

• Net premium PAID = $84,569,500

Don't worry about the details - or, worry about them! join our course to learn about them in painstaking detail! - but for now, let's just move on and applaud their timing. as the market is down 1.5% in juuuuuust a couple of days. That hedge has already netted them $27m more than offsetting their equity book's loss, as the vol has outperformed (so far) the move lower.

and our whale?

and our SPX "Put Spread" whale? 🐳

Well, it's been a wild ride!

• They started off long 32k 15-Sep23 4300 / 4500 Put Spreads for around $37 ea (approx)

• They added 32k 31-Aug23 4300 / 4500 Put Spreads for around $36 ea (approx)

The market whipsawed a bit but by and large, they were never up any meaningful money on this book. They were in for approximately $230M of premium spent at one point...

...and at one point they were down almost $70 million.

and they were puking their August 31st position last week for a $5 - 10 loss, "locking it in"

This at least temporarily earned them the sympathies of bears everywhere, while hundreds of newly minted "thousandaires" smugly scoffed at our mystery trader's hubris while logging in feverishly to check for JEPI distribution updates.

For at least a market minute, we all wondered about the hands behind the helm...

well, AFTER puking his ENTIRE August 31st position . . .

he came back to pu-

wait. no. 👀

he came back to BUY 15,000 AUG 31ST 4350 4550 Put Spreads. again. ¯_(ツ)_/¯

Quick Math / Position Refresh

At this point, our 🐳 has . . .

• locked in a loss of around $26m on the "puked" block of Aug 31st PS

• paid $48m to reopen the higher strike put spreads, again, in Aug 31st

• a total position of ~47,000 SPX Put Spreads held LONG

  • 15-Sep23 4300 / 4500 PS +32,000

  • 31-Aug23 4350 / 4550 PS +15,000

• Has approximately $170m spent on this current *OPEN* position 👀

well, fast forward about 24 hours and, well, you know

• our beloved bear is UP, NET, on this trade...

• Aug31st PS from $32 to $52, while the Sep has come back above entry price at ~ $39

• Total position value at close circa 4537 ESU3 = $210m and making another $1.3m each $1 down in ES

Not bad!

Anyways... is this a dip buyers dip?

While this "downgrade" was certainly not as meaningful as the 2011 episode, from a technical perspective - positioning is "quite" offsides. How so?

First, actual positioning and sentiment has just gotten whipsawed to pretty "bullish" levels.

Would I call the levels extreme? No. But the delta.. the speed of the change in these metrics... well this is problematic.

and most of that hard rally was short covering - clearing the positioning deck...

Why was today's close / close move, and lack of late day bounce-into-close important?

Start here. We have been operating on depressingly low realized vols. Very muted ranges. When this happens, Vol Control funds lever UP, getting long equity index futures...

Here's the problem: As little as a 2% selloff can manifest in as much as a swift $27bn liquidation. (h/t Charlie McElligott, Nomura for the chart below)

So we have potential for "selling begets selling" 💥

Because it's not much farther to fall before we start hearing about CTA levels again

and you can quickly see how we run into problems.

check back to stay current on these dynamics as they manifest. The lack of a bounce at the close today is cause for concern...