Futures have been volatile overnight – staging a rally to 4550 before pulling back to 4525. We look for an estimated 1 day move of 1.21% today, with major support at 4500 and resistance at 4562 and 4600.
Total negative gamma decreased overnight, and we note our Put Wall shifted lower. This is a signal that traders closed some in-the-money put positions yesterday, but we saw some decent puts added to lower strikes. In particular we note the 4100 strike, which is the new Put Wall. Our data suggest the Put Wall shifting to a lower strike is a slightly bearish signal (Put Wall shifting higher is a strong bull signal).
Implied volatility [IV] is obviously quite high, and that should be a dominating factor in todays market action. As usual we view a rising IV (ie VIX) as bearish, with an IV decline leading to a market rally. The gamma flip level remains back above 4600, and so we do not look for a real change in market volatility until/unless that level is regained. Look for large directional price swings until we’re back above that Vol Trigger line. Rallies and drops can fail and reverse violently.
With the VIX currently above 30, we present this great chart from @pristinecap, which shows the forward 20 day return after a 30 VIX. As you can see it tends to favor a positive SPX return – albeit with a few tails. Currently the S&P is down about 5% from the 11/22 high, and we’d note thats roughly the same magnitude from the Sep high to low. This fits into our theme of this market pullback being akin to a volatility-slingshot: load up implied volatility and that can be the vanna fuel for a strong rally.
The key for bulls is sparking a sale of implied volatility. If traders start to close put options, that can lead to dealers buying futures. We highlighted several macro factors (Covid, Debt Ceiling, Taper Talk) that could be propping up implied volatility – the clarity of any or all of these factors would reduce uncertainty and lead to a pretty strong rally.
Without that macro catalyst the concern for markets is the idea of a “gamma trap” wherein the negative gamma induced from put options becomes self-reinforcing. As markets go down, negative gamma increases and that leads to dealers shorting more futures. This could lead to an extend drawdown, and one of those markets that just can’t “get off of the mat”. We cannot dismiss the idea of the cycle starting and extending until 12/17 expiration (note the Sep low was the Sep monthly OPEX). A break of 4500 gives this “trap” more merit.
Model Overview:
4600 gamma flip level, 4500 critical support. 4600 overhead target.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4523 | 4509 | 450 | 15824 | 387 |
| SpotGamma Imp. 1 Day Move: | 1.21%, | Est 1 StdDev Open to Close Range (±pts): 55.0 | |||
| SpotGamma Imp. 5 Day Move: | 4629 (Monday Ref Px) | ||||
| SpotGamma Gamma Index™: | -1.04 | -0.71 | -0.27 | 0.02 | -0.10 |
| Volatility Trigger™: | 4615 | 4640 | 459 | 15800 | 395 |
| SpotGamma Absolute Gamma Strike: | 4500 | 4500 | 450 | 16575 | 400 |
| Gamma Notional(MM): | $-552 | $-749 | $-1,099 | $2 | $-486 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4619 | 4639 | 0 | 0 | 0 |
| Put Wall Support: | 4100 | 4400 | 450 | 15000 | 380 |
| Call Wall Strike: | 4800 | 4750 | 470 | 16575 | 400 |
| CP Gam Tilt: | 0.77 | 0.66 | 0.68 | 1.24 | 0.67 |
| Delta Neutral Px: | 4467 | ||||
| Net Delta(MM): | $1,920,605 | $1,813,878 | $232,121 | $43,119 | $109,098 |
| 25D Risk Reversal | -0.13 | -0.09 | -0.12 | -0.1 | -0.1 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4700, 4600, 4500, 4400] |
| SPY: [470, 460, 455, 450] |
| QQQ: [400, 390, 385, 380] |
| NDX:[16575, 16000, 15500, 15000] |
| SPX Combo: [4413.0, 4562.0, 4522.0, 4472.0, 4436.0] |
| SPY Combo: [439.24, 454.1, 450.05, 445.09, 441.49] |
| NDX Combo: [15775.0, 15569.0, 15966.0] |
