Macro Theme:

Short Term SPX Resistance: 4,400 Call Wall

Short Term SPX Support: 4,325

SPX Risk Pivot Level: 4,275

Major SPX Range High/Resistance: 4,400

Major SPX Range Low/Support: 4,200

‣ We remain bullish of equities while the SPX is >4,300

‣ We anticipate that the equity market volatility will continue to contract into Nov 17th expiration, and hold that view while SPX holds >4,300

*updated 11/3

Founder’s Note:

ES Futures are +8 pts to 4,384. Key SG levels for the SPX are:

• Support: 4,350, 4,337 4,325 & 4,300
• Resistance: Cluster of levels above: (4,376, 4,380, 4,384, 4,389) then 4400
• 1 Day Implied Range: 0.69%

We’re transitioning from the rally phase and into a regime of volatility tightening (i.e. smaller daily moves). This is due to the SPX shifting into positive gamma territory, and modeled by our 1 Day Implied Range declining to 69 bps from 80 bps last week. This informs us that daily ranges should indeed now start to tighten, and will likely continue to do so in through early next week.

As many of you have joined us in just the last few days, we recommend you read this note from Thursday to get caught up on the positioning leading into this week, and the mechanics at work.

Why should volatility/daily range now start to decline?

The lift from vanna/declining IV is tapped out. You can see this in the model below, wherein the spread between VIX & 1-month realized volatility collapsed last week. This spread is driven from VIX/IV getting crushed post-FOMC, but realized volatility still “working” with 1-month at +14% (and being aided by the SPX large moves up).

As outlined above, we think that realized volatility will now start to decline, but IV’s may be already now pricing that in. This, we think, should not be interpreted as a signal that the VIX is “cheap”, as its more likely that realized volatility continues to come down into next weeks OPEX. This simply means that the pace of the VIX/IV collapse should wane.

With the IV crush, the put fuel has burned up. You can see this in the plot below, which sums the delta for puts (blue) vs calls (orange). Puts are only a fraction of what they were a week ago, implying that their values have been decimated (ex: IWM from last week). As we highlighted last week, when puts lose their value it induces hedge short covering for dealers.

The final factor that should help to reel in volatility is the buildup of gamma at nearby strikes. The gamma at the 4,400 strike has increased markedly, as shown below, and is now large resistance. We would now anticipate traders increasing their short dated positions, particularly in SPY, around at-the-money levels. This increases the gamma at these nearby strikes which increases the two-way hedging flows accordingly which serves to pin markets down.

Also note that gamma increases as time to expiration decreases – this implies that the gamma at the major strikes below should grow which increases their pinning-power.

The takeaway here is that we think that playing mean reversion in Index/futures prices will now start to work a bit better than it has the last few sessions. Being short VIX and/or the volatility ETP’s may continue to work, however S&P options have likely now seen their volatility premium erode.

Upside IV may remain rich/expanded in select single stocks, and there may be some opportunity for call spread selling and/or overwriting accordingly. We compiled a list (download here) of some of these names from a scanner that is currently in beta.