Macro Theme:

 

 

Founder’s Note:

ES futures are +50bps, indicating a full recovery from yesterday’s down move. This was bolstered by strong results from TSLA, which is +11% pre-market.

For today, support is at 5,800, with resistance at 5,850. While gamma is positive, it remains mildly positive. However, yesterday’s selloff gave put sellers the opportunity to short puts all the way down into 5,725, resulting in an extended mildly-positive gamma environment all the way down to ~5,725 (green box). This suggests prices should continue to be mean-reverting.

What about yesterday?

TRACE chart 10/24/24: If you’re having trouble duplicating our founder’s notes TRACE images please check your scale-range setting between AUTO and LOW. 

SpotGamma’s analysis and tools are dedicated toward unveiling when equity markets are dominated by options flow, and, in turn, how that flow may impact the underlying market.

Whatever selling pressure hit equities yesterday (we heard several narratives, nothing concrete) was persistent, and very strong. Shown below is the SPX (candles) vs a basket of risk assets (GLD, BTC) and Treasury ETF (IEF) vs the DXY (USD ETF, blue). As you can see, there was coordinated selling in those risk assets as treasury yields, and the dollar, popped.

These flows over-rode the support that TRACE depicted into 5,800 (green box). We too found it surprising that the equity market pushed through this positive gamma support.

There certainly were some negative delta options flows, particularly in single stocks, that helped to push the market lower (see last nights note).

But what we want to focus on here was the incredibly powerful positive-delta onslaught delivered at yesterday’s lows.

You can see these positive deltas via the S&P500

HIRO

indicator (purple line), with the huge surge noted in the black box around 2pm. This was +$3bn of positive delta flows over ~20 minutes, which served to drive the S&P500 directly into the largest zone of 0DTE gamma on the board (5,800). As we detailed last night, that market low also coincided with a bounce from the $485 QQQ

Put Wall.

The point here is that the options market established itself in a major way at the ~5,760 level, resulting in a 58bps recovery (after being down 120bps from the open).

Had we been in a negative gamma environment (i.e. TRACE map was red <5,800), we suspect that equities would have not recovered as they did.

This highlights a final, key point: There are a myriad of flows, from a myriad of sources. Very few of those flows are as consistently large as options hedging flows. Sure, a large macro fund(s) can come in and move markets for a period (i.e. overcome hedging flows) – but once their position adjustment is done their impact is gone. However, options hedgers have to continually adjust.

Finally, TSLA.

Yesterday we established a view that TSLA vol seemed low into earnings (6% implied move, and longer dated IV was pricing in a ~3.5% move). This morning the stock is +11% to ~235, with an overnight high of ~240. Below is a plot from our beta gamma model, and as you can see dealers are shown to have a negative gamma position all the way into 250-260. These positions are likely to shift a lot today, but this idea of TSLA negative gamma to the upside has been established for several weeks. Through that lens we view the 250 area as resistance into the election, with 225 support.

Whats curious about this is that there is no call skew for call holders to really sell into (IV was low into this event). Surely some of the 0DTE/next exp call holders are going to roll/adjust positions (well be watching

HIRO

), but longer dated calls have little extra VRP to monetize. Given that low vol and combined with plenty of negative gamma to 250, we don’t yet see an overbought condition.