Informe SG Levels

Futures have broken lower to 4480. This pushed our gamma index to the negative side, and with that our volatility estimate shifts to a high 1.92%. We see resistance at 4525 and 4556. Support is at 4450 then 4397.

Negative gamma is poised for high volatility, as is the elevated level of options implied volatility (the gamma/vanna trades work both ways).

Yesterdays data in our HIRO indicator (real time options deltas traded) was very negative, as discussed last night. The negative deltas registered were quite large, and spread across both big indicies and stock leaders (ex: AAPL, FB, GOOGL, TSLA). Additionally (or accordingly), the cash close was quite ugly as the market broke sharply through the key 4500 support line.

While AMZN’s earnings provided an after hours futures boost, that has faded. All eyes are likely on the 8:30 jobs report as the “raison d’être” for today’s volatility. However this report plays into an options position which is already poised for large movement.

To this point, the call gamma at strikes above is not significant, so if markets can break 4525 (Vol Trigger) the gamma-based resistance above is fairly light. The put strikes both at-the-money & below have a fair amount of gamma. You can see this in the image below, wherein we rank the size of gamma at various strikes. These large put positions suggest that volatility will be quickly induced if markets decline.

With that, downside risks remain quite elevated as we outlined in yesterdays AM note. If markets slide lower its likely accompanied by an increase in implied volatility. This increases downside dealer hedging requirements, which pressures the market lower. Because we have a negative gamma position, any macro or fundamental (i.e. non options based) selling would likely be met with additional dealer selling.

The risk remains high as long as markets are below 4525. While we have focused on and give edge to downside risks, we must acknowledge the potential exists for a sharp upside move into 4600. Puts being covered and a sharp reduction in implied volatility do offer the potential for a violent rally.