Futures drifted back to 4625 overnight as markets away the 2PM ET FOMC. Gamma is flat in the S&P, while remaining sharply negative in QQQ & IWM. Combined with large amounts of single stock negative gamma we should be in for a high volatility day. In the S&P we see critical support at 4600, with resistance at 4650 then 4700. A break of 4600 likely leads to a test of 4545.

With the VIX at ~21 and SPX at-the-money implied volatility at 19% the market appears to be pricing in a one day move near 1.1%. Our gamma based forecast point to a max open/close range of 0.69%.

First, we’ve posted our EquityHub model which lays out the gamma landscape. Here you can see there is a peak in the SG Momentum indicator from 4545 up through 4700. This implies that gamma shifts sharply through that range. In other words: hedging should be active, bringing high volatility to that zone.

With that, our view remains in line with yesterdays outline.  Forward returns are somewhat path dependent. If Powell upsets markets, that would lead to sharp selling into Fridays OPEX. However, the expiration of many puts at OPEX could lead to a sharp short covering type rally next week.

The other interesting scenario here is that the market catches a bid from Powell’s appearance. Typically the Fed tries to placate markets, and implied volatility (“event volatility”) subsides. In this case the vanna/charm flows may kick in pre-OPEX, leading to a sharp rally into Friday. This scenario could be the trickier one, as a short cover relief rally could lose steam post OPEX.

Note these are very short term views strictly based around positioning – there are a lot of puts that have likely invoked heavy short hedging. We believe these flows will exacerbate very short term volatility (2-3 days), after which a strong trend sets up into year end (rest of month).

Model Overview:

4600 gamma flip level, 4550 critical support. 4700 overhead target.