Futures are down from last nights close, to 4527. Despite the reduction in S&P prices, there was a build in our gamma index, which equates at a reduced volatility estimate for today: 0.67%. Key support is at 4520 and 4500. Resistance is at 4542 and 4564.
The FB earnings fiasco certainly took the wind of the markets sails, and led to a closing VIX spike. As a result, our risk reversal metric ended with some fairly put-weighted figures suggesting a scramble for downside into the close.
The other thing of note is that we’ve had a sneaky build in S&P/QQQ gamma expiring on Friday as traders have pushed into short duration positions. We see ~20% of S&P and ~15% of QQQ gamma expiring Friday, and we think that builds today as AMZN and others report earnings.
You can see below how concentrated tomorrows expiration (light grey) is around current QQQ prices, and for that reason (associated hedging flows pinning) we anticipate the market holding pretty tight to current levels. As this gamma expires Friday night, it may “release” the current market prices (particularly upside).
We also note a fair amount of gamma positioned at 4600, which adds resistance to a push higher in the S&P before Friday. 4500 should be viewed as a large support line, but if it is broken it may set off a fresh bout of extended volatility. Our models seem to suggest 4355 would be the next material support below 4500.
To be clear, we give edge to markets holding to our volatility estimates for today; but the downside risks here are material. This rally was driven in large part by the reduction in put positions and/or put values (implied vol drop i.e. “vanna trade”) which drives dealer-delta buybacks. We’ve seen that put cover flow stall the last few days, which is not terribly surprising given the magnitude of the rally.
However, there has not been a demand for index (ie S&P or QQQ) calls. There was a voracious bid for single stock calls to start the week, but that faded sharply yesterday. Call buying is what can extend the rally when the put cover stalls out. This is because as stocks rise, dealers should be buying more stock (gamma hedging). This, along with the decline in implied volatility keeps a bid in markets.
Should demand for downside protection renew, it will add negative deltas to a weakened market. This suggests dealers would be shorting futures with gamma at/on the negative gamma flip point, and implied volatility elevated. This means that while we documented our view that ~4300 was a “lower bound” early last week, we’d estimate that something <=4200 may show as a lower bound for second leg down.
One final note for those of you watching FB, our EH1.0 models show that its at $250 where gamma induced volatility diminishes. This is implied in the chart below, wherein the call gamma (blue line) and put gamma (orange line) both flatten out at $250. We saw a similar thing in PYPL at $130, yesterday.
| SpotGamma Proprietary Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4533 | 4581 | 457 | 14785 | 368 |
| SpotGamma Imp. 1 Day Move: | 0.67%, | Est 1 StdDev Open to Close Range (±pts): 30.0 | |||
| SpotGamma Imp. 5 Day Move: | 5.69% | 4437 (Monday Ref Px) | Range: 4185.0 | 4689.0 | ||
| SpotGamma Gamma Index™: | 0.45 | 0.14 | 0.01 | 0.04 | -0.04 |
| Volatility Trigger™: | 4520 | 4520 | 452 | 14730 | 364 |
| SpotGamma Absolute Gamma Strike: | 4600 | 4600 | 460 | 14800 | 370 |
| Gamma Notional(MM): | $-187 | $108 | $12 | $3 | $-248 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4564 | 4544 | 0 | 0 | 0 |
| Put Wall Support: | 4300 | 4300 | 450 | 14275 | 350 |
| Call Wall Strike: | 4700 | 4700 | 460 | 14800 | 370 |
| CP Gam Tilt: | 1.13 | 1.06 | 1.0 | 1.33 | 0.81 |
| Delta Neutral Px: | 4545 | ||||
| Net Delta(MM): | $1,418,347 | $1,572,501 | $157,447 | $39,003 | $90,071 |
| 25D Risk Reversal | -0.11 | -0.09 | -0.09 | -0.14 | -0.13 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4700, 4650, 4600, 4500] |
| SPY: [460, 457, 455, 450] |
| QQQ: [375, 370, 365, 350] |
| NDX:[15300, 15175, 15000, 14800] |
| SPX Combo (strike, %ile): [4641.0, 4542.0, 4591.0, 4569.0, 4560.0] |
| SPY Combo: [468.46, 458.39, 463.43, 461.14, 460.22] |
| NDX Combo: [14459.0, 14844.0, 14444.0, 15051.0, 14651.0] |
