Macro Theme:

Key dates ahead:

• 3/13: GDP
• 3/18: VIX EXP
• 3/20: OPEX

SG Summary:

Update 3/11: We are now looking to \”play the range\” of 6,820 (SPY 680) resistance, and 6,600 support. We think a full vol premium contraction is unlikely this week, and negative gamma still dominates the SPX landscape. Both of these factors should keep SPX prices unstable (i.e. no pinning), and so we anticipate large swings over the next several sessions.

3/9: Our updated lens is watching for a 6,500 low into March OPEX 3/20 – Q End OPEX 3/31. Following March, we think the 6,500 floor drops out. To the upside, Vol premiums are very wide, but they are all tied to the Iran premium, which offers conflict vol, plus energy vol, which is apparently bleeding into rate vol. That said, equity vol premiums are ~20 points (massive), and from that we can see some violent market bounces as that premium contracts, but true to our recent word, vol cannot fully revert until conflicts have largely resolved. To put it more plainly: We think rips should be sold until the Iran situation resolves. Largely that seems like \”Strait of Hormuz has reopened\”.

Key SG levels for the SPX are:

• Resistance: 6,820, 6,900

• Pivot

  : 6,900 (bearish <, bullish >) updated 2/26

• Support: 6,600, 6,500 (Update 3/9: 6,500 is our Major Low target into March end).

Founder’s Note:

Futures are +50bps indicating an opening near 6,700.

TLDR: Things are the same as previous sessions: unstable. Negative gamma dominates, and so we look for further swings inside 6,600 – 6,800. Our worst case into OPEX (both 3/20 & 3/31 OPEX) is 6,500. Resistance builds sharply into 6,900.

As you can see, its “red all over” which is typical of negative gamma regimes – and it implies low stability/wide swings. While the market may have a bid this AM, we suspect traders will be shoring up their risk before the weekend, given the Iran conflict. This may zap an afternoon bid. The vol premium remains pretty fat, at 8 points, which suggests this market is well hedged. Given this, we don’t see room for “escape velocity” to the downside.

Lastly, this chart below is coming up on the X radar. The tweet with this chart was: “The cost of protection is near the most expensive levels in history.” That’s just wrong.

We’ve seen a lot of ignorant comments shooting around with the “Call Put Skew” chart below, which is adjacent to our Risk Reversal metric “Call IV – Put IV”. There is a lack of understanding as to what is happening here. What the author is measuring here is skewness, which is at extremes.

I (Brent) hope that many of you have heard our recent discussions on this, and so you are aware of these dynamics, but here it goes:

First: About Expensive: the overall cost of options is relative to other strikes and realized vol. Generally speaking, it’s the overall IV level that determine cheap or rich. Let’s frame this with the VIX. If VIX is at 10, SPX options are cheap. If VIX is at 100, SPX options are expensive (or maybe the world has ended).

In this case, what the author/Risk Reversal measures is, for 1-month to expiration options, the IV of the call minus the IV of the put. So this is a measure of call IV relative to put IV.

Therefore the Risk Reversal can be moved by calls having relatively low IV, puts having relatively high IV, or both.

To frame this better, you can use Compass to look at put skew vs call skew. This measures the 25 delta call/put vs the at-the-money option. This informs us which may be relatively cheap/rich.

In this current environment, no one wants to buy calls. However, systematics still sell them. Given this, call skew percentile is 4th %’ile! Call skew is low/offered.

However, put skew is +95th %ile! Its high/bid.

But note that last line in the white legend box: 1 M IV. Its at 19.5% for SPX. RV (realized vol) is only 11%. If you compare those two, you have a spread of ~8 points. This spread is indeed high, but a 19% IV implies daily SPX moves of about 1.2%. Does that seem like record volatility being priced in?

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