Crazy Position Adding Supports U.S. Stock Rebound, Experts Warn Hedging Sell Pressure May Make a Comeback

Odaily News The rebound in the S&P 500 index is not driven by improving fundamentals, but rather by hedging position additions? Experts warn that as the "options dividend" fades and technical indicators become overbought, the market may once again face the test of fundamentals. Recently, the S&P 500 index has staged a remarkable rebound, rising about 6% in just five trading days since the Federal Reserve's July 29 policy meeting. However, for astute investors, the underlying driver of this rally is not a turn for the better in macroeconomic fundamentals, but a "mechanical" advance fueled by options positioning adjustments.

Michael Kramer, founder of Mott Capital Management, pointed out that this rally has been primarily driven by a combination of market makers' Gamma position shifts, a rapid decline in implied volatility (VIX), and a surge in call options.

Heading into the Fed's late-July decision and key earnings reports, options market makers were generally in a "negative Gamma" exposure state. In this environment, the market is highly prone to amplified volatility: when prices rise, market makers must buy more positions to hedge their risk, and this "pro-cyclical hedging" behavior inadvertently acts as an accelerator for market gains.

As the index has climbed higher, the market has now returned to a "positive Gamma" zone. This means the hedging logic for market makers has reversed—they have begun to adopt a "contrarian approach," reducing positions as the market rises. While this force helps dampen volatility, it also signals that the strong upward tailwind from earlier is now fading.