Informe SG Levels

Futures have shifted higher to 4332. We’ve seen the 4300 level fill in with positions, and its now the largest total gamma strike on the board (from 4400). With that we see 4200 as the Put Wall, down from 4300. This speaks to a general trend of the options market accepting and repositioning around lower prices. Overhead resistance is at 4350, then 4400. Support lies at 4300 then 4265.

Yesterday there were a few rallies in the context of a market which ended lower. We believe these rallies were fueled by the covering of short duration put options (see OI chart here), the trading of which is largely tied to the geopolitical events.

With the markets flailing around in response to various headlines, the S&P term structure (shown below) remains in a backwardated state, showing that short term protection remains in demand. Short dated implied volatility near 28% equates to the market pricing in a 1.7% daily move, which is higher than our gamma driven forecasts of 1.3%.

To this point we feel the selling has been been “controlled demolition” and has respected major options level. There is a lot of volatility, but that seems to be within the confines of what is being priced in. We’ve not seen that wash-out, “panicky” type selling that often comes with capitulation. The risk of this event is certainly elevated, but the trigger would have to be something quite material to catch this put heavy market by surprise and bring a significant >2% down move.

With this in mind, over the longer term we continue to give edge to the market taking steps lower, with 4200 the major level on break of 4270. 4050 remains where we see significant longer term support.

However, on a more immediate basis we think the market could stage a strong short covering rally up into the 4400 level. This idea is mainly through the lens of the traders being possibly a bit over-hedged (i.e. puts being rich) and a market shift higher can create a capitulation trade for short term put holders. Recall that when “nothing happens” its enough for short term puts to decay, which provokes a stock tailwind.

We’d of course look for this move to ultimately fade, as has been the trend with recent rips higher. A break of 4300 would render this idea invalid.