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:

ES futures are -8 to 4,375. There are bearish shifts in our key levels, with ~25-30% of total SPX/SPY/QQQ positioning set to expire today. The

Put Walls

have rolled lower to 4,350 SPX & 430 SPY (4,310 SPX). Support levels today are: 4,350, 4,340 & 4,327. Resistance above is at 4,377, then 4,400 – 4,410 (SPY440). The SG Implied move is unchanged, at 76bps (open/close range). 

In QQQ the

Put Wall

has again rolled lower to 356, with resistance above at 36 & 365. 

TLDR: We had favored 4,400 holding yesterday, but were concerned that the pace of selling would pickup on a break of that level. Indeed the selling did pick up, as put positions (both longer dated (purple) & 0DTE (teal)) were heavy after 2:30 PM. Implied volatility has not yet responded, and both our SG model and ATM IV’s are both predicting that market volatility remains fairly muted despite the 1.1% intraday decline. We continue think index vol is likely underpricing larger moves (higher or lower) both in the short and long term timeframes, particularly with OPEX today and Jackson Hole next week.

Not surprisingly the recent moves lower have shifted today’s OPEX from a neutral expiration to one which is more put weighted (blue bars = puts, below). In general this suggests that today’s expiration may provide a bit of short term relief to equity markets. There will certainly be some larger ITM puts rolling off today, and one would think these puts are rolled “down & out”, which relieves a bit of ATM pressure, but adds gamma to lower strikes (fuel for future declines).

As we outlined yesterday, the missing ingredient from the equity move lower has been a corresponding pop in implied volatility. That is starting to shift, but in a rather controlled form. Below is SPX term structure for today vs earlier this week, and you can see that longer dated IV’s are indeed up, but the curve is still sharply in contango. If fear was a component here, then this term structure would start to flatten out, and then start to shift into backwardation. Sep Exp ATM IV’s are 14%, suggesting traders are still pricing in <1% daily SPX moves.

Somewhat more surprising is today’s ATM, 0DTE straddle is $25 (55bps) with an IV of 22%…

While the IV’s feel a bit sluggish, put flow is now dominating. This can be seen below in the single stock put call ratio, which is now back to March ’23 levels. What’s interesting here is that these put levels are spiking up without an obvious headline catalyst, like “bank failures”. Its clear that things are shifting in bonds, and that seems to be leading to equity selling as markets are continuously pressured lower. However, again, the options market is still not predicting much volatility ahead as per longer dated IV’s.

The other major change in flow was on the 0DTE side. With yesterdays somewhat sharper directional move down, 0DTE as a % of SPX volume was its lowest since July. Longer dated volumes, particularly on the put side, were clearly a larger focus yesterday (i.e. hedge demand). The 0DTE flow also receded in March of ’23 when traders began to look to owning longer dated options to hedge the uncertainty.

Today’s expiration will change the structure of positioning, but there is clearly a flattening of the gamma curve <4,300. This tells us that the rate of change of gamma is consistent, which is due to fairly sizeable put positions staggered at major strikes below (ex: 4,300, 4,200). What we look for is where this curve turns higher at downside strikes. This is starting to form <4,300, but because of OPEX today the shape is likely to change. The idea here is that when this curve shifts higher at lower SPX strikes, it implies a reduction in dealer downside exposure.

Recall, too, that this model assumes all puts are sold to dealers, which is obviously not true. Dealers certainly have some long put exposure on, not only due to traders selling some puts, but also because dealers must own OTM puts to hedge vega (they have to be long convexity). Therefore the curve displayed below is likely the “worst case” scenario. We think this helps to frame zones for larger downside targets. We’d also note that some of our other downside metrics are sniffing major lows (like Delta Tilt), but not yet there. OPEX is going to relieve/change some of this, so we’ll be discussing this in more detail on Monday.