Futures are holding just under 4700, after overnight lows of 4668. There were a few PM session tests of 4700, but they were rejected. Our models look for a fairly volatile session today, with a max open/close move of 1.0%. We also note that there is a material negative gamma position in QQQ, which suggests that very high volatility should remain in the tech sector. We see overhead resistance at 4750, with support at 4660. As long as markets are under the 4745 Vol Trigger (gamma flip line) then we look for high volatility markets, characterized by large directional swings.
Most critical to todays action is implied volatility & the vanna trade. On a closing basis, the shift in IV was material but felt lagging to the -1.8% drop in S&P prices. Based on our intraday options metrics, it was clear that put buying took place in S&P yesterday but it didn’t register as “panic”. We’ll be watching the VIX closely – and if it breaks over 20 that suggests more S&P downside is imminent. Conversely, a break to lower VIX prices likely means a retest of the 4750.
Below we’ve posted a measure of short dated put IV in SPY. When the short dated (purple) shifts above longer dated (30), its backwardation, which is a signal of fear in markets. While this metric is focused on short dated options (<30DTE) its more sensitive to quick shifts in implied volatility (vs shifts in longer dated options a few months out). Compare, for example, the market selloffs in October or December – you see the 5-10 DTE (purple) jump to higher IV levels than 30 DTE (yellow).
Our theory here is that traders were seeking material put hedges in a way they arguably haven’t in quite a while. We think much of the trading over the past year was dominated by short term, momentum type traders rapidly flipping into and out of positions (ie “noise”). While we have only one datapoint (yesterday), its an interesting signal.
We also have suspicions that much of what happens continue to be sector rotations, out of tech and speculative meme plays. This could mean that what we are seeing is “real money” selling, and no so much the “options tail wagging the market dog”. To this point we saw tech options flow yesterday dominant in call selling, not put buying. This was probably fortunate for the market, as if put buyers stepped in that adds incremental negative gamma which could fuel further downside.
In summary, we see the current market position as “concerned” but not “panicked”. Our concern with this, is that there was material declines in many stocks – and these declines would be compounded if put buyers enter the fray (due to dealers then needing to hedge new short put positions). This is why watching implied volatility is critical – higher IV indicates demand for put protection.
|SpotGamma Proprietary Levels||Latest Data||Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:||1.0%,||Est 1 StdDev Open to Close Range (±pts): 47.0|
|SpotGamma Imp. 5 Day Move:||1.92%||4785 (Monday Ref Px)||Range: 4693.0 | 4877.0|
|SpotGamma Gamma Index™:||-0.58||1.15||-0.23||0.02||-0.09|
|SpotGamma Absolute Gamma Strike:||4700||4800||470||15925||400|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4757||4767||0||0||0|
|Put Wall Support:||4700||4600||465||15000||355|
|Call Wall Strike:||4800||4800||480||15925||400|
|CP Gam Tilt:||0.86||0.73||0.73||1.11||0.6|
|Delta Neutral Px:||4594|
|25D Risk Reversal||-0.08||-0.07||-0.08||-0.07||-0.07|
|Key Support & Resistance Strikes:|
|SPX: [4800, 4700, 4650, 4600]|
|SPY: [475, 470, 465, 460]|
|QQQ: [400, 390, 380, 355]|
|NDX:[16250, 16000, 15925, 15500]|
|SPX Combo (strike, %ile): [4787.0, 4689.0, 4591.0, 4811.0, 4605.0]|
|SPY Combo: [478.22, 468.38, 458.54, 480.56, 459.95]|
|NDX Combo: [15826.0, 15497.0, 15293.0, 15905.0]|