Futures are down sharply to 4525 this morning, the VIX shows near 27. Pundits are citing the weakness as due to Covid increases & the rejection of the Build Back Better stimulus plan on Sunday – and we’d remind readers that “news matters more when gamma is negative”.
As this is a holiday shortened week, liquidity may be lighter than normal which adds to volatility.
Fridays OPEX removed a large amount of gamma (positive gamma for SPX, negative gamma for QQQ), and the futures price decline has added (or “re-added” in QQQ’s) negative gamma to what put options remain. The result is we start with a negative gamma position for all indicies. This implies that the next several sessions should be quite volatile, characterized by large directional swings. We look at 4500 as key support with first resistance at 4600. Fridays expiration reset a lot of the open interest, and there are not many gamma bars to function as support and resistance. We look for a lot of new positions to be established today which will help to form key levels.
We’ve been noting that the 12/17 expiration was “put heavy” and that could create a rally in for stocks. While we have no opinion on the “Build Back Better” plan, we would note that historically its the Monday after OPEX wherein lows are typically made.
That being said, this market will be dominated by the movement of implied volatility (i.e. the vanna trade) and how traders chose to hedge. Higher implied volatility (VIX) would indicate traders are seeking to add portfolio protection and suggests lower S&P prices. If implied volatility comes for sale (i.e. VIX lower), that shows markets are poised for a rally.
Below we’ve plotted the gamma by strike in percentile terms. While we’re still assessing this model for regular use, we felt it provided a useful illustration to place todays market in context. Because our gamma index is negative, it implies “puts” are in control – and this plot helps to illustrate that point.
The general idea is that a higher percentile rank (y axis) indicates that a strike has an historically larger gamma amount, and therein may offer stronger support or resistance (data set from Jan ’21). Puts are in red, and calls are in blue. Note that all of the gamma for strikes around indicative SPX prices (4525) are dominated by puts, and that increases if SPX prices head lower (there is an alternative gamma distribution here, too).
In this put dominated environment the vanna trade is amplified (see here for vanna explanation). This is why watching the movement of implied volatility (VIX) is so important to assessing todays price action. Put driven trading, tied to implied volatility makes the volatility-of-volatiliy high, and that continues until/unless the S&P shifts back into the presence of large call positions.
Model Overview:
New levels forming after the large 12/17 OPEX. Current environment is negative gamma, implying high volatility for several days.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4557 | 4633 | 459 | 15587 | 384 |
| SpotGamma Imp. 1 Day Move: | 0.95%, | Est 1 StdDev Open to Close Range (±pts): 43.0 | |||
| SpotGamma Imp. 5 Day Move: | 1.9% | 4557 (Monday Ref Px) | Range: 4471.0 | 4644.0 | ||
| SpotGamma Gamma Index™: | -0.32 | 0.85 | -0.13 | 0.02 | -0.09 |
| Volatility Trigger™: | 4645 | 4695 | 464 | 15775 | 391 |
| SpotGamma Absolute Gamma Strike: | 4600 | 4650 | 460 | 15925 | 380 |
| Gamma Notional(MM): | $-577 | $-255 | $-581 | $2 | $-421 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4661 | 4633 | 0 | 0 | 0 |
| Put Wall Support: | 4600 | 4680 | 455 | 15000 | 380 |
| Call Wall Strike: | 4750 | 4700 | 470 | 15925 | 400 |
| CP Gam Tilt: | 0.9 | 0.91 | 0.79 | 1.23 | 0.66 |
| Delta Neutral Px: | 4534 | ||||
| Net Delta(MM): | $1,283,073 | $2,025,717 | $153,880 | $32,694 | $86,918 |
| 25D Risk Reversal | -0.08 | -0.07 | -0.07 | -0.07 | -0.07 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4700, 4650, 4600, 4500] |
| SPY: [470, 465, 460, 450] |
| QQQ: [400, 390, 385, 380] |
| NDX:[16250, 16000, 15925, 15850] |
| SPX Combo: [(4680.0, 94.07), (4671.0, 75.99), (4658.0, 81.12), (4653.0, 83.24), (4630.0, 87.88), (4580.0, 84.79), (4553.0, 7.78), (4535.0, 0.77), (4521.0, 2.43), (4503.0, 5.16), (4485.0, 1.74), (4457.0, 6.22), (4453.0, 5.78), (4435.0, 6.05)] |
| SPY Combo: [472.96, 458.24, 453.18, 467.9, 456.86] |
| NDX Combo: [15704.0, 15911.0] |
