Investors have been searching for the “culprits” of Tuesday's oil price crash — oversupply, slowing demand, pressure from Trump... However,Goldman SachsHowever, it was pointed out that trend investors and the gamma effect were the “directors” of this collapse in oil prices.
Oil prices crashed on Tuesday, and US oil continued to set the record for the longest continuous decline.crudeThe “Panic Index” (VIX) increased explosively. Currently, US oil is already at the worst stage of overselling in history. Regarding the current oil price collapse, Goldman Sachs believes that momentum investors and investors who hedge against the collapse in oil prices should be responsible for this. Goldman Sachs said:
“Trend trading strategies are the primary factor driving this round of oil price sell-offs. Secondly, swap traders who have been increasing the volume of crude oil futures sell-offs recently should also be condemned because they manage the risks posed by existing producers' hedging plans in an environment where prices continue to fall.”
In other words, this is another negative gamma story (Gamma Story). The investment bank explained that trend investors are pushing the price of US oil futures to $60, while producers are hedging risks through put options. Of course, traders have already hedged these short positions. The investment bank stated:
“As crude oil prices fall, the incremental volume (delta) of bearish positions will increase.”
Goldman Sachs pointed out that as crude oil prices plummeted, the possibility for producers to use put options was close to 1. The seller of the put option will be the holder of that portion of crude oil. By definition, the increase of crude oil is 1. Furthermore, the earlier a put option is used, the higher the increase in short bearish positions. The change in the incremental volume of a short put option divided by the amount of change in the price of the underlying stock is known as the gamma value of a short bearish position.
The gamma value can reflect the degree of influence of the futures price on the increase. When the price of the underlying futures contract rises, the delta of the call option must move 1, while the delta-directed 0 of the put option moves. Conversely, when the price of the underlying futures contract falls, the call option delta—is directed to 0, and the put option delta moves toward -1.
As shown in Table 3, the closer the incremental change rate is to 0, the less likely a put option is to be sold, while the closer it is to 1, the more likely it is to be sold. Moreover, for put options that are most likely to be sold, the gamma value of the put option will continue to increase, eventually reaching the highest point.
At the same time, falling oil prices will increase the value-added of bearish short positions at the biggest increase, and swap traders who try to manage the risk of short bearish positions through value-added hedging (delta-hedging) will also be forced to sell crude oil sharply.
Basically, traders are being forced to sell more crude oil to preserve value, and as can be seen from Table 4, the prices of many crude oil futures have fallen to 50, 55, and 60 US dollars. This probably means that as long as the US dollar remains within this range, the volatility will remain high.
Goldman Sachs also pointed out that not only remains high, but also fluctuates widely, which will hurt the confidence of momentum traders. Furthermore, as far as the outlook is concerned, the investment bank holds this view for the time being:
“No matter when the price breaks through, it is likely that it will rise, but given the concentration of US oil put options at $50, it is clear that it is not impossible for US oil to fall to $50 in the short term.”
Therefore, if you are looking for the “culprit” of the recent collapse in oil prices, then trending investors who use key actions to push up oil prices and the gamma effect that hits the oil price key will be a good choice.
Source: Golden Ten Data