Could Market Fears Abate Toward Year-End?

An astounding $200 million dollars per day, every day, is spent gambling in Las Vegas casinos. Each day this year, there have been an average of 104,000 visitors to the city, about 75% of whom try their luck in some form or other, each spending about $2,000 a day. Still, these numbers are dwarfed by the wagers that are being made in today’s financial markets. That raises the question: has the gambling capital of the United States moved?

Almost half of the option contracts being traded on the S&P 500, to the tune of $300 billion of notional each day, have one-day expiries or less (see Figure 1). These bets that pay out if the stock market closes above, or below, a particular level are up from 10% of volume as recently as 2019, and less than 5% of volume in all the years prior to 2017. Across all listed ETFs and indices, an astounding $1 trillion of notional value in put options (bets that an index or ETF will close below a particular level) get traded each day. The influence of the “Gamma Gamblers” is one that market participants have never encountered before, and it comes at a time when the aggregate equity short position is the largest on record.

Figure 1: More than 40% of SPX option volume in 3Q22 had less than 24 hours to maturity

Source: Goldman Sachs, data as of October 24, 2022

Against such a backdrop, an investor trying to hold any long-term investment view has been severely tested this year unless they were sitting in cash. While the trend in financial asset prices has been unequivocally lower, the most violent moves have been overwhelmingly higher. In October, the velocity of daily moves to the upside dwarfed moves to the downside – almost like coming out of a severe recession, like in April 2020.

Liability managers have had a particularly difficult year, as typically “low risk” U.S. investment grade bond indices have had their greatest drawdown ever, losing almost as much money as the S&P 500 (more than 20%). And in the U.K., the safest of domestic assets – U.K. government bonds – have introduced the most volatility to portfolios this year.