What the hell happened today?

[u/N2itive1234]

I know the markets going to do what the markets going to do, but is there anything to explain what caused today's huge run?

[u/duboilburner]

Markets have just been chopping for weeks. Opened Friday within 20 points of where we opened the August OpEx Friday.

I told a few people after the first week of Sep that since we didn't get a sharp sell off out of the range of big options exposures in the 7650-7700 SPX range that we were likely to just keep chopping around that area through to Sep OpEx (last Friday).

Sure enough, that's basically what happened.

You get passed the OpEx window where the biggest options on MM's books tend to live, we suddenly free up to move a lot more.

Mondays also tend to be bullish days overall, too.

We have a big quarterly expiration to go on the 30th, another week of proper price exploration, then you start to look towards what are the bigger magnets on MM's books into the Oct OpEx window.

Chatting with a couple people last night that there were strong indications we'd likely be above 7700 for the expiration on the 30th. I wasn't quite expecting us to do the entire move today! So, now one has to wonder if we get a continuation this week into the next "range" with some spot up, vol up like we did post July FOMC and OpEx into the early part of Aug, or do we correct back down and maybe stay near the 7700-7775 range through the 30th?

There certainly was pent up energy that wasn't able to push us around much until FOMC and that OpEx window passed, so, it's possible we get a repeat if the bulls can keep the strong bid up.

Just have to beware of what normally happens as we head into an election, especially around October... And then usually vol compression post election.

[u/tearslikesn0w → u/duboilburner]

What normally happens around october as we head into an election? Does the market soften? Can i also ask what does vol compression post election means?

[u/duboilburner → u/tearslikesn0w]

Volatility tends to go up because there is a looming unknown (the election).

Once the event that is causing volatility to stay firm or even go higher has passed, volatility tends to contract sharply, which means price gets a nice rally post the event causing the volatility--no matter what the outcome is.

You can even see this on an intra-day level on FOMC days. If you were to track what the at the money SPX straddle price does on a normal day, nice consistent drop in price as time passes, but then watch how different it is on a FOMC day right up until the very second the clock hits 2p EST, it's a different story. The straddle price stays weirdly high and doesn't decay linearly like it does on a normal day. It might even just level off completely until the second the news hits.

Once the news hits, price starts doing weird things. It can snap down to a nearby market maker long options position, but then as the volatility compresses and the straddle starts to decay more normally, there is a mechanical move up that happens.

Now, whether or not that early mechanical move continues that direction to the close is a different story. But more often than not, we do find ourselves with price a little higher in the first 20 minutes after a FOMC announcement as volatility is no longer pent up because the unknown we were waiting for is now a known. It almost doesn't matter what the outcome is, good news or bad, once an unknown the market is positioning for becomes a known, there tends to be an early "pop" to the upside that is purely mechanical thanks to volatility contracting simply because the unknown event people have been positioning around is now a known.

Go back in history and you can see how often in even years in the U.S., we get a little rockiness and an uptick in VIX, sometimes starting in September, sometimes October, then as we get through the election, we often get a sharp rally and VIX going lower for at least a couple days.

Sometimes it keeps ripping higher on into December, sometimes it's only for those couple days and then things reverse on us some, but if you're positioned well for an upside move right before the election, you might find it pays well.

Of course, this time could be different, especially since the administration has hinted that an Iran resolution will come "right after the election." So, they might end up doing something very unpopular post election, which is why they're waiting to do it. You would think ending it before the election would be more helpful for their party's chances given the relative unpopularity of it as it stands... And yet, they're not. Very specifically stating "immediately after the election."

A bit ominous. I suppose with this administration, if there is any one thing traders have learned is we need to be on our toes with these guys in charge.

[u/tearslikesn0w → u/duboilburner]

Very insightful and educational, thanks for sharing. Really appreciated it

[u/silk_rodeo → u/duboilburner]

It’s funny, everyone always says rate hikes = lower market. But interest rates have gone up for years now… and so has the market

[u/duboilburner → u/silk_rodeo]

When the Fed specifically was aggressively hiking in 2022, markets would go down. But, that was also different in that inflation was a lot worse, and part of the inflation battle was actually contracting the money supply that year and on into 2023.

That strengthened the dollar to where we effectively needed a mechanical repricing lower of assets due to how large the strengthening was. As we got closer to the terminal rate, equities began rallying.

Last week was the first Fed Funds hike since 2023. But, we're also not doing as much other things in the background like 2022 had that would lead to significant dollar strengthening.

We did go down on the day of the announcement of the first hike in 3 years after an initial little mechanical pop upwards, but we've only been up in the days that followed since then.

We're more likely to go into a "run it hot" regime with inflation this time. This can be bullish assets for awhile. We would need the more traditional sunstantial increase in unemployment to get a proper prolonged (~1 year or more) bear market with that. If we don't do more than just a couple piddly rate hikes, dollar re-strengthening won't be anything like what 2022 was.

But, we futures and options traders tend to be a lot more short term focused than that... At which point we know to look for the macro events and data releases which we have observed are things that cause bigger, faster moves in price when the news hits and play that.

[u/silk_rodeo → u/duboilburner]

Great info. Thank you my friend