Informe SG Levels

Futures have recovered to yesterdays intraday high of 4370. We forecast a large max move of 1.8% today due to the large negative gamma position. Resistance is at 4400 and 4416. Support 4364 and 4325. As long as the SPX is <4400 we look for large directional swings. Despite this large max implied move we think it would take some real force to break below the 4300 strike.

In terms of yesterdays flow there was little change to open interest levels, with the exception of 20k calls added to 4400 and 4500 respectively. While we saw no fear (as per last nights note), no one seemed to cover downside put hedges, either.  Had traders sought to hedge downside that would have pushed the implied volatility term structure into backwardation and led to dealers needing to short futures – ie market losses would have been much worse.

It does appear like positions were added to todays & Fridays expirations which now hold ~10% each of total SPX gamma (so >20% expires this week). Because we now have 3 expirations in 3 days we think price action will “extra” volatile as short dated options traders + the JPM collar trade fires off.

Since implied volatility is elevated and major indicies are embedded put gamma this is a “charm & vanna driven” market. Short dated vol sellers could step in and help pop the market back up into 4430 resistance. As puts decay (charm trade) and (if) implied volatility (vanna trade) comes in then that is fuel to push markets higher. However, those are short term flows and could leave an air pocket for next week.

Model Overview:

4430 resistance into 9/30 OPEX. High volatility while markets are under 4400.