Macro Theme:

Short Term SPX Resistance: 4,750

Short Term SPX Support: 4,700

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,750

Major SPX Range Low/Support: 4,500

‣ We look for higher volatility (i.e. more market movement) starting this week (12/18), out of the huge 12/15 OPEX.*

‣ 4,750 is our current max upside target, due to a Call Wall shift on 12/13. Call Walls in QQQ/IWM are at 410/200.*

‣ A downside break of 4,700 is our interim “risk off” level.*

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

*updated 12/18

Founder’s Note:

ES Futures are +10 to 4,777. Key SG levels for the SPX are:

• Support: 4,700, 4,659
• Resistance: 4,750, 4776, 4,800
• 1 Day Implied Range: 0.67%

For QQQ, support is at 403 & 403. Resistance is at the 410

Call Wall.

For IWM support is a 195, 190 & 189. Resistance is at the 200

Call Wall.

For S&P the big resitance level at this time is the 475 SPY/4,750 SPX

Call Wall,

4,700 is major support, but a break of that level should be considered “risk off”, as there is now less support for equities post-OPEX.

This morning we see measurements of dealer positioning broadly decreased, but there are some unique 0DTE (i.e. today’s expiration) positions. The gamma from these positions are creating interesting kinks in the gamma curve, as highlighted below. This curve is inferring that there are a healthy number of puts (shifting curve in red) and calls (curve shift in green) straddling current market prices, that are expiring today.

Related to this is our 1-day implied move, which remains tight at 0.67%. We were expecting that this volatility estimate would be materially higher due to large positions expiring on Friday. This suggests that large traders have left on some fairly large Monday positions, which we speculate are OPEX-related hedges. This may support or pin the SPX today.

While we cannot recall seeing something like this 0DTE gamma positioning before, we have been seeing odd 0DTE delta volumes (i.e.

HIRO

signals) like we haven’t seen before (see Wed note). This leads us to speculate that ways of hedging OPEX flows have changed, but this occured during a major shift to Fed policy (i.e. “risk on”). Therefore it’s a bit too early to draw meaningful conclusions from these new flows, but we are putting renewed focus on 0DTE, and flag this here as those 0DTE flows appeared to be so supportive last week.

Regardless of this positioning, we shift to a “risk off” stance on a break of 4,700, as we do not see support until down at 4,650.

Zooming out, we have one full week of trading before the Christmas holiday. One would anticipate volumes starting to wane into the end of this week, and through end-of-year. Lighter volumes, along with the huge expiration/clearing of positions on Friday, can be an opportunity for volatility to sneak in.

As we’ve been stating, our strongest view is that we are looking for a strong larger trading ranges (i.e. volatility) over the next week. Fortunately for options traders, implied volatility (which can be seen an expression of options prices), is very low. You can see this via our new Implied Volatility Dashboard (now live for Alpha subs!).

Consider SPX term structure (teal), which is pinned down near the bottom the shaded cone, shown below. The shaded area highlights the 10th – 90th percentile range for SPX term structure over the last ~60 days, which highlights that we’re at lows in terms of at-the-money volatility.

Next we can turn to skew – in this case we have Jan19th OPEX (~30DTE) below. As you can see, downside IV’s are near lows (red arrows), however there is an “average” bid to +5% upside strikes, as seen in the red box.

As IV’s reflect forward volatility, the overall picture here is that traders see a low risk market, with puts being particularly eschewed.

In terms of directional edge into the final two weeks of the year, traders do seem to be positioned for upside. You can see this via the Risk Reversal [RR] metric, which compares a 1-month 25 delta call vs a similar put. For SPY we can see that this figure is near recent highs, which tells us that calls are bid relative to puts, and that ties to the S&P500 rally after FOMC.

Further, as shown in the skew chart above, this high RR is the result of a slight bid to calls, but more-so heavy put selling. Additionally, put sellers are likely remain opportunistic over the upcoming holiday period, as they seek to collect some extra theta decay.

There is also the issue of seasonality, with the equity market entering its strongest time period (see Thur note). Traders now seem universally aware of this factor, and this, combined with some long call demand, could create some upside chase. 4,800 is the all-time SPX high in early Jan 2022.

In terms of our map of prices into year-end, we’ve clearly staged at the top of the OPEX trading range (yellow box, with current SPX level = green star). OPEX clears out some positions that we think held SPX market prices down, and those positions have cleared out and/or rolled up toward 4,750-4,800. Therefore more upside is easier to obtain (as suggested above with this being a higher volatility period). With upside IV’s being relatively cheap, we think traders can enter on a variety of trades to hedge out or play this upside.

Of course volatility works both ways. Therefore we can’t dismiss the possibility of a sharp drawdown due to downside positions being cleared out out with OPEX, and the low IV. Should 4,700 break, the S&P could find less gamma-derived support, and see a jump in IV’s from these low levels. Both of those factors could create a fairly quick pullback in equity prices as dealers hedge downside risks.

This is what played out in that 2021 analogy we posted last week. Clearly in ’21 there was more equity downside into Dec OPEX, but this idea of consolidation giving way to final year end rally still seems like the way things may play out here. Just as with ’21, we think traders will jump on any opportunity to sell relatively high IV’s (aka short puts into weakness). Put selling would add supportive flows for a final year-end rally.

Our favored position(s) here are entering into slightly longer dated calls (i.e. Jan or after due to holiday time decay) or call spread structures, coupled with longer dated VIX calls or call spreads. VIX calls may hold their value here better than S&P500 puts, particularly into the face of an equity rally. For example, we could see a scenario wherein the SPX rallies sharply, which supports the VIX at current levels. However, in that scenario, an equity market rally would place S&P500 puts farther out-of-the-money which sharply decreases their value.