Market Outlook - Monday 19 September

Heard From The Basement: "Mom. MOM. PASS THE SICK BUCKET I'M GONNA VOMIT".

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Down But Not Out

Last week was a rough week in markets. The highs scaled in August receded as the heavy put pressure from September options expiry took hold. As a reminder, how this works is: if the market is put-heavy that means investors have bought a lot of index downside protection. This means that option dealers - market makers - have sold a lot of puts, which means that they hold net long positions. The business of a market maker is based on being market-neutral (or "delta neutral" meaning their holdings don't change in value based on underlying changes in the market) and to achieve this, having sold a lot of puts, they have to take short positions in the same indices or ETFs. This means shorting the index, shorting the ETF, selling futures, and so forth.

Friday last week saw a wall of index options expire - likely more puts than calls. This is likely to mean a temporary and technical respite in the downward pressure, because dealers will have to unwind their short hedges to get back to delta-neutral. So we can expect to see some short covering in the early part of this week, which whilst not as powerful as an actual risk-on rally, can lift the market somewhat.

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