Informe SG Levels

Futures broke lower overnight, and are currently trading at 4375. Our models see continued volatility, with an S.G. Implied move of 1.45% (1 stdev, open/close).  The VIX, currently 30, implies a 1 day S&P500 move of 1.89%. Resistance lies at 4397 & 4410 then 4500. Support lies at 4344 and 4300.

Our takeaway from this mornings updated data is that we seem to be approaching a “lower bound” scenario, similar to that of late January. We see a convergence of data points at 4340, and, absent some exogenous event we look for that as an interim low in the S&P. We’d also note that <335 in QQQ shows a reduction in negative gamma, suggesting support for the tech index beneath there.

Through an options lens this is a market in control of puts, and elevated implied volatility[IV]/vega. The existing put positions are large (as shown below) and the surging implied volatility levels (i.e. VIX>30) suggests puts are expensive. We’d need new and/or the rolling of put positions to significantly change our gamma profile and push that lower bound down.

However at current IV levels, incrementally large moves are required for puts to payoff. This may deter put buyers, and may incentivize put sellers to step up. Long puts closed could lead to some positive delta hedging.

We’d note this high IV is linked with large IV swings (vol of vol) which in turn can lead to rapid, amplified hedge adjustments (IV down = buy hedges, IV up = sell hedge). In other words, we do not need a change in put positions, but just a repricing of put positions to initiate large hedging flows.

If IV declines and the market does start to rally, we see little resistance above the 4410 mark, suggesting a break above that line could spark a violent move higher into the 4500 area.