Odaily Planet Daily reports: The rebound of the S&P 500 index is not due to improved fundamentals, but rather hedging and position covering? Experts warn that as the "options windfall" fades and technical indicators become overbought, the market may soon return to being tested by fundamentals. Recently, the S&P 500 index has staged a remarkable rally, rebounding approximately 6% in just five trading days since the Federal Reserve's interest rate meeting on July 29. However, for astute investors, the underlying driver of this rally is not an improvement in macroeconomic fundamentals, but a "mechanical" rise fueled by options position adjustments.
Michael Kramer, founder of Mott Capital Management, noted that this rally was primarily driven by a combination of market makers' Gamma position adjustments, a rapid decline in implied volatility (VIX), and a surge in call options.
Ahead of the Federal Reserve's decision and key earnings reports at the end of July, options market makers were generally in a "negative Gamma" exposure position. In this environment, the market is highly susceptible to amplified volatility: as prices rise, market makers must buy additional positions to hedge their risk, and this "momentum-driven hedging" behavior inadvertently acts as an accelerator for upward price movements.
As the index continues to rise, the market has now returned to the "positive Gamma" zone. This means that market makers' hedging logic has reversed—they are beginning to adopt a "contrarian" approach, reducing positions as the market rises. While this force helps dampen volatility, it also means that the previously strong upward momentum is weakening. (Morningstar)