Futures are down sharply to 3640, but well off of the overnight lows of 3595. Covid headlines are being assigned as the reason for this move, but don’t find it coincidental that this volatility picks up directly after the large December expiration.
This chart from Goldman reiterates just how large this OPEX was (h/t ZH). The boards were essentially reset not only in SPX but in single stocks, too.
With that markets certainly appear set to open in negative gamma territory with downside risk significantly elevated as long as SPX<=3700. We have to remark that the Zero Gamma level of 3666 doesn’t give us the “warm and fuzzies”.
Our main issue here is that the bulk of the options hedge positions rolled off last week. If traders decide to initiate new put hedges that could significantly weaken markets as new long puts leave dealers short deltas, requiring them to short futures.
We’d also note that much of the market buoyancy was the result of short term call options which require participants to step in and buy new long calls each week. If this initial market weakness leaves them to hold back, that could reduce a “long delta” buying force.
As you can see below last weeks single stock option call buying premium was down despite all that TSLA call buying. Granted its still significantly elevated above “pre-covid” levels, but we reiterate that much of this call buying premium is reflexive buying related to higher prices. In other words – will dip buyers step in if prices aren’t trending higher?
VIX will be the key variable on the open today. A higher VIX may indicate traders seeking additional protection and signify more weakness ahead in markets. If the VIX drops back down that supports the idea that dip buyers are stepping in and we could see a quick reversion back to the 3700 area. Again, our models suggest elevated risk and high volatility as long as markets are below 3700.
Macro Note:
new Jan range setup this week.
| SIGNAL NAME | LATEST DATA | PREVIOUS | SPY | NDX | QQQ | ||
|---|---|---|---|---|---|---|---|
| Ref Price: | 3647 | 3704 | 363 | 12586 | 310 | ||
| VIX Ref: | 28.59 | 14 | |||||
| SG Gamma Index™: | 0.58 | 0.60 | -0.02 | 0.01 | -0.00 | ||
| Gamma Notional(MM): | $-136.00 | $200.00 | $-856.00 | $1.00 | $-39.00 | ||
| SGI Imp. 1 Day Move: | 1.0%, | 36.0 pts | Range: 3611.0 | 3683.0 | ||||
| SGI Imp. 5 Day Move: | 3647 | 2.05% | Range: 3573.0 | 3722.0 | ||||
| Zero Gamma Level(ES Px): | 3666 | 3668 | — | 0 | |||
| Vol Trigger™(ES Px): | 3695 | 3695 | 369 | 12275 | 305 | ||
| SG Abs. Gamma Strike: | 3700 | 3700 | 370 | 12725 | 300 | ||
| Put Wall Support: | 3500 | 3500 | 365 | 11500 | 290 | ||
| Call Wall Strike: | 3750 | 3750 | 375 | 12725 | 315 | ||
| CP Gam Tilt: | 1.32 | 1.19 | 0.7 | 1.16 | 0.95 | ||
| Delta Neutral Px: | 3521 | ||||||
| Net Delta(MM): | $9,304.00 | $9,450.00 | $1,299.00 | $241.00 | $554.00 | ||
| 25D Risk Reversal | -0.06 | -0.06 | -0.04 | -0.09 | -0.08 | ||
| Top Absolute Gamma Strikes: SPX: [3700, 3675, 3650, 3600] SPY: [380, 375, 370, 365] QQQ: [320, 310, 300, 290] NDX:[13000, 12725, 12600, 11500] SPX Combo: [3681.0, 3655.0, 3706.0, 3699.0, 3630.0] NDX Combo: [12770.0] SPX is below the Volatility Trigger™. The 3666.0 level is first level of resistance and is critical as its the negative gamma threshold. The trigger level of: 3695 will act as overhead resistance. Watching VIX is key, if volatility comes in dealers will start to buy back shares as their short puts lose value. This could start a rally. The total gamma has moved DOWN: $-135.96MM from: $200.00MM Gamma is tilted towards Puts, may indicate puts are expensive Negative gamma is moderate favoring further swings in the market |
