Macro Theme:

 

Short Term SPX Resistance: 4,600

Short Term SPX Support: 4,550

SPX Risk Pivot Level: 4,500

Major SPX Range High/Resistance: 4,600

Major SPX Range Low/Support: 4,200

‣ IV levels are anemic (~8%), which suggests that a pop higher in IV/equity downside is due. A break of 4,500 is our “risk off” level.*

‣ 4,600 is our current max upside target, as call positions are not yet building above that level.*

‣ January OPEX is setting up to be a major event, with a risk that expiring large long call positions could pull markets lower.*

*updated 12/08

 

Founder’s Note:

ES Futures are flat at 4,583. Key SG levels for the SPX are:

• Support: 4,550, 4,517, & 4,500
• Resistance: 4,590, 4,600, 4,615
• 1 Day Implied Range: 0.55%

For QQQ, resistance remains at 390 & 395. Support is at 388 & 385.

IWM resistance is at 190 with support at 185 & 181.

The NFP release is this AM at 8:30EST. While there is a lot of attention to this figure, todays at-the-money straddle is pretty tight at $34 or 75bps (ref 3585, IV 24%). Further our 1-day daily range is extremely tight at 55bps.

We therefore think the NFP has to print sharply outside of expectations in order to break the big gamma padding to the upside at 4,600 SPX – 460 SPY

Call Wall

(SPX 4,615), and 4,550 to the downside.

 

Ultimately the larger move likely comes two sessions from now, into CPI/FOMC/OPEX next week. This period likely triggers a break of this very tight range that has held over the last 16 sessions.

We are closely monitoring a shift higher in the

Call Wall

for a signal of higher SPX prices, and continue to prefer IWM as a way to express upside vs SPY. This was a theme we’ve recently discussed, and one Goldman picked up on yesterday. The general idea being that the IWM has room to its 190

Call Wall

(2.5% from current levels), while the SPY/SPX is rather jammed up into 460/4600.

 

Further, the IWM is poised for volatility (i.e. larger movement), with traders likely holding a lot of long call positions (vs S&P short calls). This IWM long-call-lean is seen through various skew metrics like the Risk Reversal metric (purple line, also see the skew in the Tues note), which shows the IV of a 30 DTE call vs 30 DTE put. The higher this metric goes the more calls are being bid relative to puts.

Also, shown below from Goldman via ZH, is record call open interest.

Volatility, of course, works both ways, and so while IWM may outperform to the upside it would also likely fair much worse if markets roll over. Further, the elevated IV’s indicate calls may be a bit rich here, and so we prefer IWM call spreads.

For the downside, we continue to see 4,500 as major support for the next few sessions. As indicated above, because IWM should exhibit sharply higher volatility, it too makes for a more interesting expression of downside (ie playing IWM puts vs SPY).

Zooming out, we understand that many are waiting for a final Santa Clause rally. We think that final rally is up to the CPI/FOMC, which should spark a directional move which will be then be spurred on by the large December 15th expiration.

Linked to this, we’ve been discussing the interesting analogy below, comparing this current period to December 2021.

As you can see below, the SPX is currently unchanged since this same week back in Dec ’21 (black line). Just like with this week, that period was just before CPI/FOMC/OPEX, which ultimately triggered a quick move to 4,700, which briefly reversed after OPEX. However, there was was a final +5% rally to close out the year at 4,800. The CPI print back in Dec of ’21 was a +6.8% beast, and rates were near 0 back then, so there are clearly macro differences, but there are some options positioning similarities.

While we aren’t convinced there will be a huge rally to close out this year, we do see massive single stock calls set to expire this Jan OPEX. Jan OPEX was also huge, and call heavy, into year end ’21, and we think that positioning led to the violent drawdown seen in Jan ’22 (green to yellow lines on the chart).

Currently there is some path dependency to the impact of Jan OPEX, as if the market rallies then the call positions tied to Jan ’24 OPEX grow in size, which may increase the impact of expiration. Conversely an equity drawdown from now to year end would reduce the value of these Jan calls, therein mitigating their impact. We’ll obvious have more on this in the coming weeks…