Futures are once again flat to last nights close: 4695. There was a small reduction in gamma, but overall it remains quite positive. This implies another tight trading range today, with 4700 being the key strike. Resistance lies at 4703 and 4726. Support 4675.
We saw a few small shifts in levels overnight. First, note that the SPY and SPX Call Walls shifted down to 470 and 4725 (from 472/4750). This appears to be the result of large positions added to the 470/4725, rather than a reduction at those higher strikes. This suggests more “pinning” fuel for today into Friday.
Second you may note the Put Wall has shifted back to 4400, as we anticipated (see our note about the “gap” here). As this is the strike with the largest amount of put gamma, we find it a bit concerning that it lies nearly 10% down. The implication is that the market is underhedged, particularly when you reference our Risk Reversal metric at -0.05 (suggests market favors calls over puts).
Taking the notes above in consideration, we’ve posted the gamma by strikes below. Call gamma levels are the positive gamma bars, puts negative bars. Note the grey shaded area, which shows the amount of gamma contained in the 11/19 expiration. We calculate this as roughly 25% of SPX gamma expiring which is why we look for the trading range (aka volatility) to expand into next week. At this moment short dated at-the-money SPX options are still near a 10% implied volatility, suggesting the options market isnt pricing in larger volatility next week.
This does not mean that the volatility has to express itself in lower S&P prices, but we think the market is not positioned to absorb lower prices. As we don’t see robust hedges, any shift lower may invoke some put hedging which could initiate short futures hedging from dealers. To be clear, this isn’t an “limit down” type scenario, but any selling could have a lot of “speed” down to 4500 support.
As always we maintain the default expectation that markets will continue higher, until/unless the Vol Trigger level is broken.
We actually view a drawdown here as ultimately constructive, as a decline in markets may “charge up” implied volatility, which fuels the vanna (dealers buying back futures as puts lose value) trade if/when markets bounce. This could play into the year end rally.
Should we keep the positive tone, then we’d look for the Call Wall to shift higher as a signal the options market is in sync with higher S&P prices. In that scenario we’d then consider 4700 as a base of support, rather than resistance.
Model Overview:
Positive gamma means the market should be supported as long as SPX>4650.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4692 | 4685 | 468 | 16343 | 397 |
| SpotGamma Imp. 1 Day Move: | 0.64%, | 30.0 pts | Range: 4662.0 | 4722.0 | ||
| SpotGamma Imp. 5 Day Move: | 2.05% | 4694 (Monday Ref Px) | Range: 4598.0 | 4791.0 | ||
| SpotGamma Gamma Index™: | 1.79 | 2.18 | 0.18 | 0.08 | 0.00 |
| Volatility Trigger™: | 4645 | 4645 | 467 | 16190 | 397 |
| SpotGamma Absolute Gamma Strike: | 4700 | 4700 | 470 | 16300 | 400 |
| Gamma Notional(MM): | $594 | $419 | $451 | $8 | $-88 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4649 | 4642 | 0 | 0 | 0 |
| Put Wall Support: | 4400 | 4680 | 463 | 15920 | 390 |
| Call Wall Strike: | 4725 | 4750 | 470 | 16320 | 400 |
| CP Gam Tilt: | 1.39 | 1.19 | 1.1 | 1.58 | 0.94 |
| Delta Neutral Px: | 4462 | ||||
| Net Delta(MM): | $1,983,036 | $1,968,929 | $208,398 | $61,286 | $102,925 |
| 25D Risk Reversal | -0.05 | -0.05 | -0.07 | -0.05 | -0.06 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4725, 4700, 4675, 4650] |
| SPY: [470, 468, 467, 465] |
| QQQ: [400, 395, 394, 390] |
| NDX:[16500, 16320, 16300, 16200] |
| SPX Combo: [4731.0, 4754.0, 4703.0, 4806.0, 4726.0] |
| SPY Combo: [471.89, 474.23, 469.08, 479.38, 471.42] |
| NDX Combo: [16453.0, 16371.0, 16355.0, 16666.0, 16404.0] |
