Macro Theme:

 

Short Term Resistance: 4,500

Short Term Support: 4,425

Risk Pivot Level: 4,400

Major Range High/Resistance: 4,600 – 4,615 (SPY 460/SPX 4,600 Call Wall(s))

Major Range Low/Support: 4,400

‣ IV Ranking suggests many significant single stocks have their lowest IV’s in months, which may be an effective way to play directional movement out of 8/16 – 8/18 expiration**

‣ We look for market support in to Wednesday 8/16 VIX Exp, with 4,500-4,550 short term resistance*

‣ Current positioning suggests 4,400 would be a major interim low, with traders likely taking a directional cue from Jackson Hole on 8/24-8/26*

‣ <4,400 would be a significant “risk off” as dealer negative gamma increases*

*updated 8/14

**updated 8/16

 

Founder’s Note:

Futures are 10pts higher to 4,430. Key SG levels remain unchanged, with large support at 4,410 (440 SPY) – 4,400 SPX. Resistance above is at 4,426 and 4,450. The implied move has widened some to 76bps.

The QQQ

Put Wall

has rolled lower to 360, with resistance above at 365 & 367.

First, in regards to IV’s, then 0DTE:

IV’s are modestly higher. The VIX popped to 16.8 (+0.5pts) yesterday, but there is still no signal of downside demand. Despite yesterdays move lower the SPX was only -60bps intraday yesterday, and this keeps realized volatility low. This in turn, means there is no fundamental reason for IV’s to increase. The second component, demand for positionining/hedging against higher volatility, appears to be absent. This would be the other factor that would drive IV’s higher.

The worry here for equities would be if those IV’s pick up, it forces put prices higher which drives negative delta/vega hedging flows. Suddenly this downside grind could turn into a spill-over. As IV’s are still low the price of insurance is still reasonable.

We say this while in the camp of thinking 4,400 holds, leading to test 4,500 into next week.

0DTE:

We’ve been flagging these uniquely elevated 0DTE volumes for several weeks, and the banks have now caught on (see ZH).

There are two comments in this article that relevant here:

“… we now have 4 of the top 10 all-time 0DTE Options volume days (and today will be #5) take place since the start of August, which, as Nomura’s Charlie McElligott explained, “feed the intraday gaps and overshoots in both directions on Dealer hedging impact.”

Per Goldman’s Scott Rubner:

“This is the example from yesterday. The most traded option line yesterday in the US market was the SPXW 8/15/23 4440 puts traded 99,000 contracts or $45B billion notional. At 3:18pm the delta on this option was ~10% (cost $.70 cents), by 3:40pm the delta on this option increased to ~80% (cost $9.00), resulting in substantial delta from market makers!”

Yesterdays 0DTE% volume was 49%, which, while high, is on the lower end of the past few weeks. However, that understates it’s impact.

This is the

HIRO

flowbreakdown from yesterday, and as you can see the flow was fairly flat until 2:30 PM (first red arrow). Then around 2:30 the negative delta options flows picked up, and that flow persisted until ~3:45PM. The critical insight here is that the lines displaying 0DTE flow (teal) and All Expiration flow (purple) almost perfectly overlay, which tells us that the bulk of yesterdays orderflow was 0DTE.

Here is what’s odd about this flow. The bank desks have also made it clear that they see this as a negative gamma environment, and our naive gamma calculation (SG Gamma Index) suggests that the same (while the SPX is <4,460). However, our daily range/volatility estimate (the SG Implied Move), which is derived from gamma positioning, has remained rather tight throughout the last several weeks. This metric has also been surprisingly accurate despite the market move lower. We say this as not to spike the ball, but to emphasize the fact that while some derivative flow strategists are flagging negative gamma and larger moves, we have not really been getting larger moves which is in sync with the SG model. <4,400 and/or with OPEX passing is where our models suggest volatility increase.

These same strategists may flag these elevated 0DTE flows as uniquely impacting markets. However, despite these extra-elevated 0DTE flows are new phenomenon, our daily range estimate continues to be accurate. Again, we say this not from a place of pretentiousness, but as it almost seems to imply that the source of some of this 0DTE flow is from the dealer or dynamic hedging community. This is very much speculation at this point, but one would think that if this flow was from some new, exogenous source it would start to violate these daily ranges. For now it could be a coincidence, but its certainly thought provoking.

Looking forward, our bottom line is this: we like long volatility positions (calls and/or puts) out into September. We think that the muted IV’s (both index and single stocks) is likely to expand out of OPEX & Jackson Hole (some comment that Jackson Hole is a non-event, but there is a small IV event premium). The removal of options positions on Friday may also free up some directional movement.

<4,400 the downside pull becomes stronger and volatility likely spikes. Accordingly we’d look for quick test of 4,300 with VIX >=20. Conversely, because IV’s are not particularly elevated, vanna has not become a major component as fuel for a rally, and so we’d look for a high of 4,500 into next week while traders await the Fed. Out of Jackson Hole we’d look for a larger directional move.