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Positioning-led Decompression

15 April 2014 by HCM

A fairly dull day was eventually brought to life by geopolitical worries. Most of the session was spent in a tight range on credit indices until the last couple of hours, when news of heavy fighting in Ukraine broke out. That brought buyers of protection to the market, and the move was quite telling about positioning. Numerous investors have added to compression positions recently, and some were quick to start the unwind process. iTraxx Crossover was the clear underperformer of the day, on the back on that. So today’s price action was driven by technicals, and tomorrow could be no different. It will be option expiry day, and if positions are light on the new series of indices, they appear heavier on series 20 in Europe and series 21 in the US. Gamma negative positions have been accumulated by the dealer community on the 250 strike in iTraxx Corssover 5 year series 20 (ITXEX20) and on the 80 strike on the iTraxx Financial Senior 5 year series 20 (ITXES20). We are getting dangerously close to these levels, and the widening could get further momentum if they are broken.