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Andy Constan
Follow @dampedspring 62.8K followers

Sep 27 •
14 tweets • 3 min read

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$JHEQX redux 101. Today I will update the old thread I did on the the JPM collar.

First what is this thing. @JPMorganAM invented a mutual fund where investors
would own an active portfolio designed to outperform the SPX benchmark while
tracking that benchmark BUT

Would also have only 5%of the downside each quarter and a capped upside of less than 5%. To do this
they need to buy a hedge from dealers and reset the hedge every quarter. The product was wildly
successful and has grown to 20BN and is closed to new investors. They now have

Two other versions have been created by JPM starting on the intra quarter months but still quarterly.
They are smaller so the focus goes to the flagship which resets its hedge this week. It's impact is
underestimated by most. I take it very seriously but also acknowledge

That it is very public and frontrunning by all direct participants and observers is very active. In addition
month and quarter end flows were large and unpredictable prior to this trade confusing the mix.
Nonetheless I will isolate what happens to the direct participants and

Assume they do limited gaming. Let's start with the strike prices of the hedge that expires Sept 30th. The
dealers sold a 3580 put and bought a 4005 call. (They also bought a 3020 put from JPM which I will ignore
for now). They dynamically hedge their exposure by being short

Futures and adjusting their hedge. Yesterday the market moved down 40 handles for the day. The delta on
the 3580 put increased by 2BN dollars in aggregate for all the counterparties that sold the put to JPM. That
means they all need to short 2BN more futures from the prior

Nights close. At the moment the futures are up 52 points and if they close here the hedge falls by 2.5BN
and the dealers will need to buy futures in that size on the close. Doesn't sound like a great trade selling
low and buying high. But the loss on that trade is "covered"

By the reduction in value of the 3580 put they sold. When I say covered that means if the realized
volatility is the same as the current implied volatility of the put the dealers roughly break even. So this
short gamma activity will take place over the next few days as long

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 As the market remains in proximity to the 3580 strike. If however the 4005 strike becomes in play. Then
the dealer becomes long gamma and they sell high and buy low. That activity tends to dampen volatility
and pin the market to 4005. But unless there is a massive rally that

Isn't a factor. So that brings us to charm. Currently if nothing happens all options of this structure expire
worthless. Because the dealers are still short 4BN of futures after today they will have to buy this hedge
back between now and Friday. That hedging flow is called

Charm. Now we have to consider the new hedge that will be placed on the morning on Friday. The dealers
will have no futures position hedging the old trade and the all the old trade will be worthless. So to set the
new trade which will be a put spread collar they will need to

Sell about 12BN in futures on Friday. The structure traded will be a put sold to JPM struck at 95% of spot
and an 80% put bought from JPM which would cost JPM. But JPM will sell a call struck at whatever level
that will make the trade costless. That will be something like

103% of spot. The entire trade will have about a 58% delta and dealer will need to hedge by selling 12BN
on Friday. So simply put. The next three days will have sizable negative gamma flows exacerbating
volatility and charm flows which will squeeze the market higher while

Ending on Friday with a massive sell program of 12BN. This whole thing will be gamed by all the wise
guys you can imagine and the flows will be dampened by that activity. But the math works as I described.
Let the games begin
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Benn Eifert
@bennpeifert
🥷🏴‍☠️ Alex Good
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Sep 27 Oct 3

ok. this references the big daddy of all elementary
confusions in derivatives. Black-Scholes (and related)
1/
models, for which Nobel prizes were won: we do NOT
use them as models, we use them as normalizations only,
as a convenient change of variables.
what do I mean here? A model, as I mean it, is a
simplified description of truth, of how the world works.
We make some assumptions and draw some logical,
mathematical conclusions. A normalization is just a
Credit Suisse. Below I will summarize what has
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Credit Suisse options price an explosive equity move
over the next 3 months. Implied vol of 61 at decade highs
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2/ CDS are a bit hard to understand, so instead I'll focus
on the bonds. The 2025 Credit Suisse bonds pictured

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@PauloMacro
Concoda 🥷
@concodanomics

Oct 9 Oct 10

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currency but it’s your problem.” Ever heard this line? 1/9
A balance-of-payments crisis in developed countries like
UK or Germany are a *de facto banking crisis* because
govt bonds in DMs are considered risk free, and so there
is basically no capital backing those assets in anyone’s
portfolio including banks or pension funds. 2/
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Andy Constan Andy Constan
@dampedspring @dampedspring
 @dampedspring @dampedspring

Sep 28 Sep 28

Using my roll framework for the JPHEX collar In June Here's how the $JHEQX trade has delta market impact
2022 the roll created a 12 BN sell and contributed to a Let's assume is Friday and the market is where it is.
The
bottom dealers will have the old collar and no delta as all
options are out of the money
JPM will have the old collar
and it's long stock portfolio
In March 2023 the roll created a Buy of 8BN creating a
top The the roll happens and the roll is done delta neutral
with a deep itm 0DTE option providing the dealers with
the roughly 12BN of short exposure for the new collar
In December the roll created an 8BN buy contributing to that they will need. All they have to do is convert that
t
Read 5 tweets Read 9 tweets

Andy Constan Andy Constan

@dampedspring @dampedspring

Sep 25 Sep 24

Some charts about how investors (retail?) IRA/401K etc DM Balance of Payments Crisis 101.
Currently the UK is
may act a brief thread fwiw in the midst of what some are calling a BoP crisis.
Europe may also be in the beginning of such a crisis.
While the Yen is falling as rapidly against the USD Japan
No correlation coincident is not likely to be as exposed to such a crisis.

This is a complicated topic and equally complicated to

What about after they get their statement. Nope no simplify but I will try.
Put simply a country and all
correlation countries that export and import goods and services and
invest in foreign assets of have foreigners invest in their

Read 4 tweets Read 19 tweets

Andy Constan Andy Constan

@dampedspring @dampedspring

Sep 17 Sep 14

Why is inflation bad 101. This is a complex topic and one
that I don't fully understand. Nonetheless I'll share my
understanding and hopefully we all can improve our
understanding. Firstly I want to differentiate between
DM inflation and EM inflation and high inflation and
Here's my nuanced interpretation of Rays comments.
Humbly I have no clue if I'm right. Nonetheless I see him
saying that inflation pressures will last a decade. This is
stated clearly. However the path matter. He seems to
expect the fed will fight inflation for the next year

Hyper inflation. EM inflation is often caused by different Or more and then either choose to give up or declare
dynamics than DM inflation. In particular EM and premature victory only to see sustained inflation above
Weimar Republic inflation and the subsequent hyper target return and accept that. On that path lies higher
inflation is often caused by large debt denominated in real rates and falling gold and stocks and all assets. With

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