Yesterday’s market action saw a significant increase in volatility, driven by a rebound in dealer long gamma. According to a note from Goldman Sachs, the market has rallied back into a pocket of dealer long gamma, with front-end vols more bid and skew softened across the surface. This move was reflected in the cost of short-dated gamma, which surged after today’s straddle realized more than 3x to the topside, while tomorrow’s straddle went out at just 41bps ($31.7).

The opening of higher fixed strike vols across the curve was a key feature of the session, as spot prices continued to creep higher throughout the day. In line with this trend, the Nasdaq Volatility Index (NDX) outperformed its peers among the three major indices, with NDX Oct fixed strike vol up 2.86v compared to SPX Oct fixed strike vol’s 1.12v gain on the day.

This dynamic was further evidenced by the flattening of the term structure on this move, as front-end vols became more bid. This led to a softening of skew across the surface, as dealers sought to hedge their positions in the face of rising volatility. The resulting increase in demand for volatility options was reflected in the surge in the cost of short-dated gamma, as dealers sought to protect themselves against potential market movements.

Overall, yesterday’s market action highlighted the ongoing influence of dealer long gamma on volatility dynamics, and the importance of monitoring this factor for investors seeking to navigate the complexities of options trading. As always, it is essential to stay informed about the latest market trends and developments in order to make informed investment decisions.