Futures are a bit lower to 3730 but off of overnight lows of 3705. We’re obviously starting in negative gamma territory today with initial support setting up at 3700 and upside resistance at 3770. Because we’re in negative gamma territory options dealers are likely to be trading with markets today which expands volatility.
The most interesting SPX flow was in net put closures >=3750 as seen below. There were similar changes in SPY, too. These changes were likely traders closing and/or rolling puts into the weak market, and this likely capped some of the end of day volatility as it reduced some dealer short delta exposure.
The Put Wall has shifted to 3600 which forms as the downside target should 3700 break. The market is likely to be subject to many liquidity events in the next few days which may lead to wild moves both up and down, and we continue to see a great deal of volatility and risk in markets ahead.
Back in August we coined the term “weaponized gamma” after news broke about SoftBank’s large options positions. Our opinion at the time was that SoftBank wasn’t purposely trying to force markets higher through options trading. Our concern was that it was made clear to market participants that the leverage invoked by options could inflict major volatility.
It turns out the entity was wallstreetbets , and when funds tried to bet against them things rapidly accelerated. Last night we noted that the White House commenting on GME suggested systemic issues were appearing, and a short while later the reddit.com/wallstreetbets site and chat system were shut down (the site later returned, the chat did not).
In 1980 the Hunt Brothers began to corner the silver market and the silver price shot higher. As a result the governing body (COMEX) changed margin requirements to shut them down:
What’s different here is that retail isn’t invoking leverage in the same way, but its clear many funds are playing these names with leverage. Several brokerages have now implemented trading restrictions around these stocks. Of course wallstreetbets is looking to go on the offensive, and all the major squeeze stocks are pushing higher today.
We don’t know what the immediate outcome of this is, but we do know that rules are being changed and losses are being realized. This elevates risk meaningfully.
Macro Note:
Feb Range 3750-3850
| Signal Name | Latest Data | Previous | SPY | NDX | QQQ | ||
|---|---|---|---|---|---|---|---|
| Ref Price: | 3727 | 3730 | 373 | 13022 | 319 | ||
| VIX Ref: | 37.21 | 37.21 | |||||
| SG Gamma Index™: | -0.27 | 0.54 | -0.10 | 0.01 | -0.06 | ||
| Gamma Notional(MM): | $-326 | $-542 | $-531 | $1 | $-377 | ||
| SGI Imp. 1 Day Move: | 0.92%, | 34.0 pts | Range: 3693.0 | 3761.0 | ||||
| SGI Imp. 5 Day Move: | 3849 | 2.0% | Range: 3773.0 | 3927.0 | ||||
| Zero Gamma Level(ES Px): | 3803 | 3806 | — | 0 | |||
| Vol Trigger™(ES Px): | 3770 | 3820 | 379 | 12575 | 324 | ||
| SG Abs. Gamma Strike: | 3800 | 3800 | 380 | 12800 | 315 | ||
| Put Wall Support: | 3600 | 3500 | 370 | 10500 | 300 | ||
| Call Wall Strike: | 3900 | 3900 | 385 | 12825 | 330 | ||
| CP Gam Tilt: | 0.88 | 0.65 | 0.81 | 1.1 | 0.66 | ||
| Delta Neutral Px: | 3653 | ||||||
| Net Delta(MM): | $1,105,727 | $1,062,588 | $181,935 | $36,642 | $70,944 | ||
| 25D Risk Reversal | -0.13 | -0.08 | -0.13 | -0.09 | -0.09 | ||
| Top Absolute Gamma Strikes: SPX: [3800, 3750, 3700, 3650] SPY: [385, 380, 375, 370] QQQ: [325, 320, 315, 310] NDX:[12825, 12800, 12600, 12500] SPX Combo: [3823.0, 3625.0, 3801.0, 3629.0, 3674.0] NDX Combo: [12738.0] The Volatility Trigger has moved DOWN: 3770 from: 3820 The PutWall has moved to: 3600 from: 3500 SPX is below the Volatility Trigger™. The 3803.0 level is first level of resistance and is critical as its the negative gamma threshold. The trigger level of: 3770 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 has moved UP: $-327MM from: $-542.00MM Gamma is tilted towards Puts, may indicate puts are expensive Negative gamma is moderate favoring further swings in the market |
