Great question, let me take a stab at it specifically, and then share two videos from SpotGamma which go into the mechanics of options flows and how they affect markets.
Generally speaking, either one of two things happen when any event like the FOMC takes place - markets like what it hears and rallies, or doesn’t like what it hears and dives. What makes this obvious response interesting near an opex is two additional things come into play - volatility and gamma hedging.
Almost by definition, once the event is over and uncertainty is removed, vol goes down. So MMs need to hedge less. In a strong put environment, this means they need to reduce the amount of shorts they hold. Releasing shorts is a positive flow for the market, and so market should go up. And because we are in a negative gamma environment, MMs add to the movement in the same direction, so when it goes up, it should go up fast. (This is what happened in the last two quarterly expirations.)
In the FOMC press briefing, JPow didn’t say anything positive, but didn’t say anything too depressing either. He openly recognized more of the reality we are in, said he would do what he could, but noted that it was not all in the Fed’s control. Between the 75bps the market was accepting and a more realistic JPow, we would have expected the market to view this relatively positively to the extent that selling would not ensue. If selling did not ensue, the mechanics described above should have started some sort of a rally.
Markets sputtered up a bit, but I wouldn’t characterize what we saw as a rally - it felt rather weak and waffled around. Yet it did not dive either, which is what the other option was. Holding steady is usually not an option in these situations.
Right now, I feel like we should keep falling into Friday because of the overall worsening economic situation and all the put gamma that is pressing down on us. While we are above the SPX3700 level, the SPX4000 above us is very beefy indeed. Best I can think of is: All these negative gamma levels were too much to punch through for the volatility release that followed the not-too-negative FOMC presentation.
I do still think we’ll see a rally next week because then all this put gamma that behaves like an anchor is gone. I personally wouldn’t get calls now though, but consider them Tue AM. (Markets closed on Monday.) At the moment, holding puts into Friday.
Edit: @Yongsooyuk6 's analysis that arrives at a similar conclusion is here.
The actual experts will dissect this, just like they did for the March one which also surprised us, so will be keeping an eye out for that. Here are two videos from one of those folks - SpotGamma. The first is around the general mechanics of gamma hedging, and the second is specifically around this opex, released yesterday.
