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 50bps higher to 4,400. Resistance for today is at 4,400 – 4,410 (SPY 440). Support is at 4,350, then 4,326. Our implied move remains stubbornly tight at 0.76% (open/close SPX move). 4,400 is the major gamma strike on the board, and the major level to watch for this week.

The SPY/SPX

Put Walls

have shifted lower to 430/4,300. The Put Wall is our major support level, and now the bottom of our range.

In QQQ support is at 355, with resistance at 365 & 367.

While there is a nice bounce in futures here, we think a breakout/breakdown is unlikely through Friday 8/25 & Jackson Hole. Positions did come and fill in around the 4,300-4,400 area, making it much less put-heavy vs last week. This likely means that another leg higher in IV only comes if the SPX < 4,300. This may lead to a fair amount of churning this week, and so we’re favoring mean reversion into

large gamma strikes

. Further, we anticipate the record 0DTE volumes to return, after being more muted the last few sessions. This 0DTE, in our view, has been feeding mean reversion.

As of Friday’s close, over the month of August the SPX was down -5.4%, with the QQQ -6.4%. Despite these declines, realized volatility has remained contained. This can be seen in plot below, wherein both SPX 1 month RV (green) & 5 day (red) are ~9.7%. This low realized vol in the face of sharply lower equity markets is a bit strange – and certainly feels like ’22 wherein long puts did not really perform.

However, with the break of 4,400 on Thursday, IV’s started to reflect signs of concern. The term structure flattened out, as you can see for today (pink) vs 1 week ago (grey), and there is also some event-vol tied to 8/25. While that elevated IV is likely to be sticky, 0-4 DTE “pre-Fed” option IV’s have little reason to be significantly elevated this week, we think this is particularly true through the lens of the low realized volatility.

With the 0DTE IV’s somewhat tied down, the VIX did start to perk up, grazing 19 before the market open on Friday. With realized vol’s not popping, the elevated VIX is showing some fear premium. The chart below shows the VIX vs 1 month realized SPX vol, which is above the long term mean. We need to contrast this elevated premium vs the ATM SPX IV’s above, which are just ~14%. It suggests there is a bit of a bid to OTM SPX puts – some tail hedging into recent equity market weakness.

While there certainly has been some angst in the equity market, we also know there was a lot of froth in single stocks heading into August. Call IV’s were through the roof, and that premium/stretched valuations needed to burn off. If you look at where the options flows were last week, they were very concentrated in single stock long puts (both buying long, and covering short puts), as shown below in the weekly OCC data.. There was not much buying in Index or ETF puts.

Relatedly, while the SPX realized volatility is low, there has been some strong single stock corrections (ex: AAPL -11.5% from 8/1). This flow is essentially the opposite of June-July, wherein there was a massive bid to single stock calls and AI/megacap tech ripping higher, breaking down correlation. Now we seem to have a bid to single stock puts, but not much on the index side.

One could frame this recent equity weakness as the froth being unwound, aided by the specter of higher rates. We say this as there really isn’t a strong bid to index volatility – there doesn’t seem to be this fear that equities as an asset class are set to drive materially lower. In other words, we reset after things got a bit too crazy to the upside.

This brings us to Friday, and the Fed. While Jackson Hole may not be a critical FOMC, it may initiate a directional move that either spools up some equity fear that feeds into the large Sep OPEX, or it sparks relief that drains of the IV premium which is starting to appear.