An assessment of $SPX as it relates to gamma positioning.

Assuming institutional investors (e.g. pension funds, hedge funds, large funds) have written $SPX calls between 3175 and 3200, their brokers (aka “dealers”) have had to hedge those writes by trading in the opposite direction (i.e. buying calls and selling futures). Buying calls is long gamma.

At the same time, many institutional investors have been selling downside puts. The brokers hedge by buying the puts along with the underlying. (Reward to risk, in that trade, favors a small gain with a low probability of a big loss.) Buying puts is long gamma.

So, that’s where we’re at right now, as we approach OPEX next Friday – large volumes in Dec 20 ITM calls and, overall, the market remains very long gamma. Several metrics point to bullish continuation and we’ll need to pay attention to order flow – are Dec ITM calls being rolled to higher strikes in January? (And that’s what I’m seeing early inklings of.)

Last, but not least, the Fed is about to pump 0.5 trillion into the financial system through the end of the year.