S&P (SPX) dealer gamma is imploding to the lowest level since 2023 as the stock market is collapsing before our eyes.

We warned earlier that this can happen, and what we are seeing is the complete absence of volatility.

From a mechanical flow standpoint, several forces are at play at once, the two most dangerous below.

First: Option dealers face a serious situation as they slipped into a short gamma regime this morning. This means their delta-hedging mandate forces them to sell futures into a falling market in order to stay market-neutral. Selling into a weak market takes liquidity out of the system and increases realized vol - this is happening now.

Prepare for violent bounces though: the same dealer mandate requires buying futures into a rebound as well, and even minor triggers such as a drop in implied volatility immediately trigger a wave of buying. Watch out for that!

Second: Vol control funds have already started to reduce their equity (S&P 500) exposure, and are sellers in all scenarios (chart below).

We estimate that this cohort will sell between 35 and 50 billion dollars over the span of a week, depending on the severity of the crash.

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