Futures have been volatile overnight with a high of 4575 and current prices near lows at 4535. Our models suggest another large trading range today, with a max open/close move of 1.14%. Critical support lies at 4500, with resistance at 4565 then 4600.
We continue to give edge to a market rally given the elevated implied volatility which could release and spark a market rally. The issue for bears (or those holding puts) is that those puts are expensive and require either:
1) elevated levels of implied volatility
2) lower market prices
to offset the time decay of put position. The decay in those puts can lead to dealers buying back short hedges, which pressures the market higher. We’d note that sharp market rally into the close on Friday was likely tied to large strips of in-the-money puts being closed in SPX & SPY (see here).
With that noted we highlight 4500 as critical support. Positions are weighted towards puts below that strike, particularly in SPY. We note there are currently 3.3 million SPX puts tied to 12/17 expiration and if selling picks up we see a reflexive negative gamma feedback loop, explained here. Essentially a break of 4500 may indicate that realized volatility (i.e. actual S&P movement) will rise to meet current implied volatility.
Essentially we see a feedback loop awaiting input. Above 4600 the trading reinforces a bullish feedback loop, and under 4500 the selling spools up.
Many of you have probably seen the attention being paid to the VIX, and its elevated state (premarket VIX=30). Below we’ve plotted realized volatility in the SPX. You can see that current 5 day realized vol (red) is a fair amount less than that of noted crisis such as Dec ’18 crash.
However, the VIX >=30 is at or above Dec ’18 levels. Clearly the VIX regime post March ’20 (Covid Crash) is different, but the SPX price movement required to “realize” 30 VIX are the same. From this perspective you can make the case that the market is “overhedged”, and we think its harder for overhedged market to crash. Put prices are high, and that may deter incremental put buyers.
While we are giving edge to a rally into next week – you must respect the downside. This is a market for large directional swings and not mean reversion. 12/17 expiration is 2 weeks out, and just ahead of that is a major FOMC meeting on 12/15.
Model Overview:
4600 gamma flip level, 4500 critical support. 4700 overhead target into Dec OPEX.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4559 | 4537 | 453 | 15759 | 383 |
| SpotGamma Imp. 1 Day Move: | 1.14%, | Est 1 StdDev Open to Close Range (±pts): 52.0 | |||
| SpotGamma Imp. 5 Day Move: | 4.1% | 4559 (Monday Ref Px) | Range: 4373.0 | 4747.0 | ||
| SpotGamma Gamma Index™: | -0.61 | -0.60 | -0.13 | 0.01 | -0.08 |
| Volatility Trigger™: | 4565 | 4565 | 457 | 15800 | 393 |
| SpotGamma Absolute Gamma Strike: | 4500 | 4500 | 450 | 16575 | 400 |
| Gamma Notional(MM): | $-329 | $-425 | $-496 | $2 | $-417 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4620 | 4632 | 0 | 0 | 0 |
| Put Wall Support: | 4100 | 4100 | 445 | 15000 | 380 |
| Call Wall Strike: | 4800 | 4800 | 470 | 16575 | 400 |
| CP Gam Tilt: | 0.87 | 0.8 | 0.84 | 1.18 | 0.7 |
| Delta Neutral Px: | 4469 | ||||
| Net Delta(MM): | $1,938,439 | $1,928,980 | $227,070 | $45,422 | $108,186 |
| 25D Risk Reversal | -0.12 | -0.12 | -0.12 | -0.11 | -0.11 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4700, 4600, 4500, 4400] |
| SPY: [470, 460, 455, 450] |
| QQQ: [400, 385, 380, 375] |
| NDX:[16575, 16000, 15500, 15000] |
| SPX Combo: [4479.0, 4428.0, 4675.0] |
| SPY Combo: [445.08, 440.1, 464.57] |
| NDX Combo: [15622.0, 15417.0] |
