3 Things Nobody is Pricing Correctly
By Eli Gal Levy, Senior Analyst
The option book’s magnet walks downhill into the meeting, and it is the only thing on the Street that does.
Max pain is treated as a single number for a single day. It is a curve, and this one has a slope. The strike that maximizes option-holder losses is 7,720 for this morning’s expiry, 7,700 Wednesday, 7,725 Thursday and Friday, 7,700 on the 14th, 7,675 on the 15th — and 7,650 on the 16th, the day of the decision. Then it snaps back to 7,705 for the quarterly on the 18th. A seventy-point downhill walk from here to the FOMC, and an immediate recovery afterwards.
Nobody reads it that way because max pain is reported as a daily curiosity rather than a term structure. The shape says something specific: contracts written for the decision date were sold around a lower strike than contracts written for either side of it. Set that against Section 06, where four desks changed their view of Fed policy in nine days and not one moved a year-end target.
The people writing options for the sixteenth marked their book down. The people writing research marked nothing. One of those groups has money at risk on the specific day.
The cushion everyone is leaning on has an expiry date, and it is the 18th.
“Long gamma, dealers dampen” has been the reassuring sentence in every letter including this one for six of the last seven sessions. It is true. What is never said is where the gamma lives. Of roughly $25.5 billion of net dealer gamma across the four nearby contracts, about $17.6 billion — close to seventy per cent — sits in the September monthly alone. The two front weeklies contribute a few billion each. October is a rounding error.
So the dampening is not a property of the market’s structure. It is a property of one expiry, which dies on the morning of 18 September alongside $6.2 trillion of notional, on the same day the Bank of Japan meets with a hike 63% priced, two days after the FOMC. The market spends eight sessions inside a cushion that vanishes on the ninth. Every scenario map being drawn for this meeting quietly assumes the volatility-suppressing mechanism survives it. It survives it by two days.
A third of the inflation the Fed is about to tighten against may be a semiconductor shortage.
Fundstrat put a number on it that nobody has picked up: flash memory accounts for roughly 33% of the excess inflation in core PCE. Set that beside the physical market. Korean DRAM export prices are up 37% since May while volumes fell 13%.
HBM3E trades at four to five times its contract price. The bill of materials on the iPhone launching tomorrow is up 38% year on year, driven primarily by memory. And on Monday the Kospi rose 4.61% while Hong Kong fell 0.85% — same session, same news, opposite directions, because Korea was trading the shortage and Hong Kong was trading the Fed.
If a meaningful slice of the core overshoot is a supply shock in one component, a policy rate does nothing to it except squeeze the demand that is not causing it. That is the strongest version of the hold case and almost nobody is making it — the doves are arguing about labor slack and tariff pass-through instead.
It also implies something uncomfortable for the other side: if the committee hikes into a memory shortage and the shortage resolves on its own timetable, the tightening will look, in hindsight, like it worked. Both camps have an incentive not to examine this, which is usually the sign that it is worth examining.
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