Before I get into this post, I do apologize for my lack of persistence on this blog. I plan to post once a week about my thoughts on "the market", and where I think it may be heading. For this post, it will be a general market update on investor/trader positioning. The following posts will be more centered around volatility updates and forecasts.
Large Player Positioning on the S&P 500 Futures Contracts (ES)
Like pervious posts, my data comes from the CME group and its analysis on S&P 500 futures contracts, the 'ES'. Further, we will continue to focus on data originating from "Dealers/Intermediaries", which are essentially market-makers within this derivative contract. The reason why I will continue to focus on positioning numbers from market-makers is because they must be able to play both sides of a market, long or short, and to be able to quickly shift their long or short bias if new HFT information is presented to them. There are a plethora of other reasons, but in an effort to keep this explanation short, I believe they have the best short to medium-term information possible to any market participant. Now, to the data.
The above graph represents net positioning of a variety of market participants within the ES futures market, mainly that of Dealers (market makers), Asset Managers, and Leveraged Funds (hedge funds/CTAs). This information comes out every Tuesday, containing data on the previous Friday's trading day. One important thing to note is that, the majority of the time, dealers are predominantly net-short in terms of their positioning. So, when dealer positioning is positive, this is a huge moment. However, the important piece of information to note here is the relative change of dealer positioning. Are they getting more net short? Less? On a 3 month time frame, dealers have been predominantly short, controlling between 22.1% - 26.6% of notional volume taking place within the ES market. Dealers have achieved the highest notional short position on this respective 3 month time frame, with their aggregate net short position being more than $805 million (~ +10% increase from 2/2/2021), and also having the highest net spreading notional amount of about $95 million (~ +228% from 2/2/2021), with net long positioning down by ~ -12.5%. The average net long, net short, and spreading notional values throughout this timeframe are $371,162, $768,969, and $60,393, respectively. Their respective z-scores are -1.545, 1.286, 0.624. This can mean a couple things. First, since the S&P 500 has made 9 all-time-highs this month (does not even feel real saying that), dealers are taking risk "off of the table" by representing the second largest market-neutral positioning (spreading) in this timeframe, as well as having the highest short inventory. If dealers, which are assumed to have the best short to medium-term information available to market participants, are getting more defensive in their net positioning, then I would begin err on the side of caution. However, this does NOT mean that I am not bullish on the S&P 500, just that those with the best information are positioning for a pull-back of some magnitude.
Market Positioning on the S&P 500 Options on Futures Contracts
An interesting observation about recent options positioning by participants would be how there are some metrics that indicate that the majority of open interest is skewed towards call options on ES contracts, while some say it's the other way around. Let's investigate this. In the first figure, OI seems to be (generally speaking) evenly distributed around a number of futures contracts, with no clear exhibit of bearish or bullish directional bias. In the second figure, the majority of the ATM futures contract open interest, no matter of maturity, would be a clear distinction towards upside leveraged products (calls). However, the key thing to note would be the difference in activity between the ATM contracts and OTM contracts. For example, in the third figure, the most actively traded, as well as the futures contract that holds the greatest degree of OI, would be that of ESM1. The total amount of ITM calls and puts on this contract are 126,712 and 3,659, respectively. The total amount of OTM calls and puts would be 73,984 and 449,902, respectively. This makes intuitive sense on how there would be a vast amount more of ITM calls than puts, and more OTM puts than calls. Investors are acquiring protection on their core long positions (that are now ITM) via put options, as the S&P 500 has been on an absolute tear (and I believe we just made our 10th ATH as of overnight futures trading). So, this clear distinction between ITM and OTM calls and puts is reasonable. Also, just a fun fact, the put-to-call ratio of the ESM1 futures contract is am astounding 2.26. The first and third figure show data from Wednesday (4/28/2021), and the second figure is as of this trading day (4/28/2021).
The Greeks
Another key piece of positioning information would be that of investor/trader net effects of OI as Greeks. As stated above, the majority of option OI is levered towards put contracts (specifically OTM contracts), so it can be expected that the net effect of OI on option Greeks will be geared towards the bearish leveraged volatility product. For instance, on futures contracts expiring in 9 (EW1K1, ESM1), 16 (EW2K1, ESM1), and 51 days (ESM1, ESM1), their aggregate net option volume for puts, delta, and vega are as follows: 27,244 , -1,471, and 131,512. Their aggregate net option OI for the same metrics are as follows: 344,672 (aggregate net OI is puts), 83,902 (net delta is heavily positive), and 94,917 (net for put contracts). This could potentially signal a couple of things. First off, there is an obvious demand (in terms of OI and volume) skewed towards OTM downside protection, and understandably so after 10 all-time-highs in a single month. Net volume delta across these 3 contacts is predominantly negative, at -1,471, while OI delta is 83,902 (net, so representing calls here). Again, this makes intuitive sense. If the vast majority of put option positioning of OI is OTM, then the OI delta for those option contracts are bound to be much lower than that of the ITM call options (which take up the majority of call option positioning, remember). However, when looking at a volume perspective, we get a more accurate sense of which directional bias investors have towards underlying movements, with volume delta being -1,471. Again, this makes intuitive sense, since the majority of options activity is occupied by OTM puts (since they are assigned a negative delta as you are betting the underlying will decline in value). In terms of directional volatility betting characteristics, there is a strong bias towards demand for future volatility in terms of vega exposure, with aggregate net vega in volume and OI, both for puts, being 131,512 and 94,917, respectively. This is reasonable to imagine since the majority of put option bets are being placed on the futures contact that are farther out in maturity than the others considered in this small example (the farther out in time the option expires, the more positive vega exposure is, A.K.A dealers assign a premium, and the closer to expiration the option becomes, and smaller (and more negative in certain instances) vega becomes). There is clearly significant demand for bearish implied volatility. Below is the figure in which I pulled all numbers from (as of 4/28/2021).
Conclusion
This data seems to show that the overall market is positioning for a moderate pullback in the S&P 500 within the short to -medium-term. However, with put/call ratios on the 3 nearest ES futures contracts closest to expiration (EW1K1, EW2K1, and ESM1) being 2.60, 5.00, and 2.26, respectively (relative to OI), there contains the possibility of a moderate potential short-squeeze if not enough investor positioning is offloaded during the next pullback.
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