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Should We Blame Options?

14 June 2016 by lberuti

Despite a benign close in the US overnight, European credit looked like it could get out of control early in the morning. iTraxx Main (ITXEB) rapidly went traded as wide as 88bps (almost 6bps wider on the day!) and iTraxx Crossover (ITXEX) as wide as 373bps (22bps wider at that stage). More Brexit fears were to blame, but they were only the sparks that triggered a move which was effectively fuelled by negative gamma positions. One of the busiest option expiry of the year takes place tomorrow. In such circumstances, people who sold options have some heavy rebalancing to do when the market is going through the exercise price of the options they sold. Specifically, this morning, they had to buy protection when the credit market was going wider, as the 85bps level was breached on ITXEB and ITXEX approached 375bps.