Top Goldman Trader Says Use This Bounce To Reset Downside Trades

As President Trump came within inches of declaring 'Mission Accomplished' yesterday afternoon, stocks soared and implied vols tumbled (alongside crude)...

As top Goldman Sachs derivatives trader, Brian Garrett, noted this morning, the vol market reaction to yesterday’s trading suggests significant hedge unwinds went through.

Investors sold protection in size, leading to one of the most significant underperformance of implied volatility (delta adjusted) in 2+ years...

Goldman's trading desk highlighted specifically that they saw unwinds of March downside, and purchases of April spreads.

Both of these flows supply dealers with a left tail / crash gamma.

For the bears

This market is less hedged this morning than it was yesterday.

This could exacerbate volatility on the go forward.

For the bulls

Historically, when vol reacts like this it has marked a tactical bottom in the S&P...

Prior episodes had very clear technical levers (post aug5) or off-ramps (liberation day).

This time it is less clear and Garrett suggests investors use this reset to put on IWM or SPX downside.

• Apr 95/85 put spreads offer attractive payouts

• IWM is 6:1 payout // SPX is 9:1 payout (max loss premium paid)

Garrett also highlights that CDX IG has not flinched in the same capacity as equity vol...

...taking a shot on credit shorts could also make sense.

Finally, we note that SpotGamma points out that gamma is quite negative across the entire spectrum of SPX prices, which backs the idea that high volatility should continue. Further, we note that 1) vol retains a large premium of ~10 vol points, and 2) has come in enough that "re-spiking" is a legitimate concern.

• For upside levels, 6,900 is the only area where we'd draw strong resistance levels. This is due to the persistent call selling that we'd see come in as the SPX approached that level.

• To the downside, we are still watching that 6,600 - 6,500 level for major support, as the JPM strike and its gamma is not going away before 3/31.

COR1M is some proof of that statement that equities had a correlated risk-off. Here we see COR1M jumped to ~35, before receding.

This in theory signals that the dispersion trade has some edge to it, and if that is true the re-engagement of that strategy may put that stabilizing bid back into stocks.

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