Sharp increase in call option overwriting limits volatility: Equity Insight

Gamma offerings from options-based ETFs, and especially from call option rewriting funds, have rebounded to near record highs, according to JPMorgan strategists including Bram Kaplan. This flow of short-term put options has led to a suppression of both implied volatility through the selling of options and realized volatility through hedging of long range positions by dealers.Strategists note that assets under management in oversubscribed funds have grown to $125 billion, representing about 63% of the roughly $200 billion in assets in U.S. options-based ETFs.

Proving the market impact of overwriting call positions is complex, especially given the volume of over-the-counter overwriting flows, which means that positional images are valued. Of interest to traders looking to play short-term price reversals are “call walls,” which form when interest in open call positions accumulates at a certain strike and expiration.

“I believe these levels exist and can act as resistance in short time horizons — especially in low-volatility environments where the effect is more pronounced,” says Garrett DeSimone, head of quantum administration at OptionMetrics. “However, it is difficult to demonstrate empirically, as isolating price movements induced by new information from those caused by mechanical hedging near the ‘call-wall’ strike is a real challenge.”