Goldman Sachs' TMT trading desk points out that the implied weekly volatility of US stocks this week is approximately 89 basis points, the lowest level in about five years, with its VIX (fear index) at only 0.36/10. Meanwhile, Goldman Sachs estimates that,
options market makers currently hold approximately $15 billion in positive Gamma hedging positions, at the 99th percentile historically.
These positions tend to make market makers sell when the market rises and buy when it falls, effectively adding a shock absorber to short-term volatility. The report also estimates that 96% of S&P 500 companies have entered the stock buyback window, with announced buyback authorizations exceeding $1 trillion.
Corporate buyback demand may also help absorb selling pressure in the summer's thin liquidity environment.
Currently, long-term yields are still rising, and oil prices are rebounding, indicating that macroeconomic disturbances have not disappeared, but the derivatives market's pricing of short-term volatility is already very low.
As long as dealer positive Gamma and corporate buybacks continue to provide a buffer, short-term volatility in US stocks is likely to remain suppressed; if these two supports weaken, the extremely low volatility itself will increase the sensitivity to renewed price amplification.
