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Blame the Greeks

Former Stanford business school professor, Myron Scholes

Photograph by John G. Mabanglo/AFP/Getty Images

Former Stanford business school professor, Myron Scholes

August S&P 500 option positioning put significant pressure on realized volatility. Overwriting, collaring at 1400 level, put pressure on implied and realized volatility; ~$5b of long gamma imbalance (per 1 percent move in S&P 500) existed over past ~10 days. One of largest estimated long gamma positions of dealers on JPM’s records helped pin market around SPX 1400.

—Marko Kolanovic, strategist, JPMorgan, in Joanna Ossinger, Long Gamma Position Expiry May Boost Volatility, Bloomberg First Word, 17 August 2012.

I believe the above is in English. If it is lost in Google translation, consider what you and I need to know. It is slow out there. Very, very slow.

(Gamma is a valuable measure of derivative price movement. It is the “second-order” gauge after “first-order” Delta. Those brave, can go in search of “third-order” Speed and Color. Anyone trespassing into the “fourth order” will be shot and thrown into the Cave of Convexity.)

Delta, Vega, Theta and their brethren are “The Greeks.” They are the legit language of derivative people. They assist those of the cult in measuring option price change, and the noise around it, as they hedge and then re-hedge and then re-hedge the re-hedge of their belief, their initial trade. (Tip: Alpha is never whispered as The Greeks kill Alpha.)

It is stunningly quiet this August 2012. And you don’t need Gamma to know it. Theta, time, tells us all slow things come to an end. For now, look east from fractious Madrid to Athens. Blame the Greeks. Discuss.

Keene hosts Bloomberg Surveillance 7-10 a.m. ET on 1130 AM in the New York metro area and nationally on SiriusXM 113.

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