Macro Theme:
- A break of $4,200 invokes our “lower bound” concept
- We see substantial, longer-term support at $4,050 due to large open interest at $4,000.
- A break of $4,000 invokes “capitulation” risk
Daily Note:
Futures have dropped to 4035 from overnight highs near 4100. Its clear volatility will persist today, with large support at 4050 & 4000. Resistance shows at 4099 then 4125.
Our volatility estimate is 1.2% for today (open/close) with the 5/9 expiration SPX straddle trading near $60, or a 1.5% move (ref: 4040). Additionally the VIX is near 34, implying a 2.14% daily move for the SPX.
All eyes are now on the large 4000 support area (total OI: 220k calls & 450k puts). We’ve noted its significance for some time, as its the last strike with any meaningful call interest. You may note in the image below that to the left of 4000 there is no call gamma at any strike (i.e. positive gamma bars).
We’ve also been referring to the area <4200 as a “lower bound” due to the fact that we’re near max dealer put positioning. The idea here is that generally dealers are selling futures against short puts (as investors own long puts for hedges). However, as we all know, options values are convex which is a problem when your hedge (short futures) is linear.
The issue for traders here is that your short futures hedge pays (for example) 1:1 on a market decline, but a put may change 5:1. This is the stuff margin calls are made of.
Therefore, while you can hedge small moves by shorting futures (i.e. delta trading), you can only hedge convex moves with long options. For this reason we believe dealers own a lot of tail risk (i.e. OTM options) which hedge that “convexity risk”.
When IV (i.e. VIX) starts to push into the mid-30’s we opine that these tail hedges start to gain in value, which in turn may reduce the short delta requirement(s) of dealers. In other words – they may not have to short as many futures (i.e. deltas) to stay hedged. In theory this should reduce downside stock pressure as a function of increased liquidity.
This is why we maintain the view that markets should bounce in the 4050 area.
The issue here for markets is a catalyst. Its clear that the reaction to the FOMC was negative as both stocks & bonds are lower (10Y yield touched 3.2% today). If the general market continues to liquidate we’re worried that the declines shift from something of a controlled demolition (i.e. fairly steady declines), to a limit down/capitulation type scenario.
As we all know, not all flows are tied to options. If large equity liquidations persist to pressuring the S&P below 4000 – that will likely tie to a IV “release” which finally brings new YTD VIX highs and a capitulation type scenario. As below 4000 is purely put positions we think any options based support is fully eroded.
Here is a chart of SPY ATM IV going back to the Jan ’20. As you can see, despite the turmoil this year IV has been fairly contained, and uniform stock selling. A break of 4000 invokes larger short delta obligations on dealers due to “pure put” positioning <4000, and likely new IV highs.
We want to again highlight the 5/20 OPEX as a potential turning date, which is a full 2 weeks out. This is the first major area wherein options positioning may be a bullish catalyst for markets due to the expiration of large put positions.
We’ve not pegged another potentially bullish catalyst for markets before then, and so we think our best case scenario for the current environment is large, violent market swings akin to late Feb/early March. With that, any rally here should be considered short covering, and subject to quick reversals.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4123 | 4124 | 411 | 12692 | 309 |
| SpotGamma Imp. 1 Day Move: Est 1 StdDev Open to Close Range |
1.21%, | (±pts): 50.0 | VIX 1 Day Impl. Move:1.9% | ||
| SpotGamma Imp. 5 Day Move: | 2.99% | 4123 (Monday Ref Px) | Range: 4000.0 | 4247.0 | ||
| SpotGamma Gamma Index™: | -1.61 | -1.65 | -0.32 | -0.03 | -0.12 |
| Volatility Trigger™: | 4350 | 4300 | 432 | 13975 | 345 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 400 | 14050 | 300 |
| Gamma Notional(MM): | -853.0 | -909.41 | -1477.0 | -4.0 | -758.0 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4327 | 4393 | 0 | 0 | 0 |
| Put Wall Support: | 4000 | 4000 | 400 | 13000 | 300 |
| Call Wall Strike: | 4700 | 4700 | 427 | 14050 | 312 |
| CP Gam Tilt: | 0.59 | 0.55 | 0.48 | 0.61 | 0.51 |
| Delta Neutral Px: | 4343 | ||||
| Net Delta(MM): | $1,681,501 | $1,738,812 | $181,408 | $48,906 | $120,152 |
| 25D Risk Reversal | -0.11 | -0.1 | -0.09 | 0.0 | -0.11 |
| Call Volume | 457,738 | 638,076 | 1,822,891 | 4,093 | 1,057,537 |
| Put Volume | 899,357 | 1,025,518 | 2,546,787 | 9,802 | 1,204,905 |
| Call Open Interest | 5,320,617 | 5,472,619 | 6,400,331 | 52,946 | 4,234,407 |
| Put Open Interest | 10,166,185 | 10,369,872 | 10,548,498 | 58,410 | 6,691,371 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4300, 4200, 4125, 4000] |
| SPY: [430, 420, 410, 400] |
| QQQ: [330, 320, 310, 300] |
| NDX:[14050, 14000, 13500, 13000] |
| SPX Combo (strike, %ile): [4099.0, 4049.0, 4148.0, 4008.0, 4202.0] |
| SPY Combo: [408.87, 403.94, 413.81, 399.82, 419.16] |
| NDX Combo: [12515.0, 12718.0] |
