Informe SG Levels

Futures have pushed higher, indicating the S&P500 should open just above 4800.  We saw a slight build in gamma, which leads to reduction in our volatility estimate for today: 0.58% (max move open/close in SPX). The key “pivot” area for today is 4800, with resistance at 4825 and support at 4775.

Looking at the gamma levels for the composite S&P500 (SPX+SPY), the level we are watching for markets to “digest” is 4820-4825 (=480 in SPY). Following that is the SPX Call Wall at 4850. Note the SPY Call Wall remains at 480 which tells us that “fair value” for the S&P500 is in this 4825 area.

As noted for several days, our theme here was for implied volatility to reduce this week, which would fuel a rally in markets. We thought that vanna trade (dealers buying back futures due to IV reduction) would take place into a lower gamma environment (which provides less market resistance), and the combination of those elements would lead to fresh SPX highs.

That IV reduction appears to be in play, with short dated at-the-money SPX IV nearing 12%, and the VIX at recent lows of 16.5. As we forecast a 0.58% one day move, we think SPX at-the-money should be a bit closer to 10%. Based on this one could estimate that there is a bit more left for IV sellers.

Couple that with the gamma building up near 4850 we think that is a reasonable overhead target for now, as if the market was to push to that level we would see our volatility estimate shrink, and the “vanna fuel” turn from tailwind to breeze.

We do not see a catalyst for selling in the S&P, and hold 4745 as critical support. Beneath that level is where negative gamma kicks in, and we’d anticipate a large spike in volatility.