Futures popped a bit, currently trading near 4400. We remain in high volatility mode, with major indices adding more negative gamma. Support lies at 4400 and 4345. Resistance stands at 4430, 4450 and 4500.
Before yesterdays open we saw implied volatility deflating and signals that the related hedging “feedback cycle” flows (vanna, negative gamma, and expiration induced charm) would push markets higher. This forecast was dashed by a combination of Ukraine headlines + Fed talk, which have served to push the VIX futures structure to an inverted state. This suggests that the market is now more sensitive to changes in implied volatility which could result in faster market moves.
Adding to this vol-of-vol is today’s expiration wherein we measure roughly 25% of total gamma in the S&P & QQQ expiring. We see most of the today’s total gamma now centered around the 4400 strike. As markets hold this negative gamma stance, it implies that the bulk of positions expiring today are put positions. We generally view the expiration of put options to be a short term bullish event, however this put-heavy expiration is simply reducing a “very large” negative gamma to just “large”. Over a slightly longer term view we see the reduction of put positions as opening a lower, lower bound for markets, too. In other words expiration is reducing some hedge protection.
There is also a Monday market holiday to throw into the mix. Typically we would look for put reduction before long weekends as traders seek to avoid paying theta, however traders may look to hold some insurance against geopolitical uncertainty. It also feels increasingly clear that the uncertainty around interest rates will not be resolved until the March 15-16 FOMC meeting. With that, the high implied volatility & negative gamma position may remain elevated in through those dates.
We view the markets reaction to the geopolitical events as amplified by the high implied volatility and negative gamma, but its the interest rate saga creating the major angst.
Therefore any short term bounce provided by put covering & implied volatility reducing (from, say, reduced Ukraine tensions) would be considered “transient” as we expect prices to remain unstable for some time. Linked to this choppy, fast price action is liquidity. Shown below is the top of book liquidity in the ES E-mini futures, which has reduced sharply in ’22. This lower level of liquidity suggests that traders will have more price impact to get fills, which induces volatility.
|SpotGamma Proprietary Levels||Latest Data||Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:||1.47%,||Est 1 StdDev Open to Close Range (±pts): 65.0|
|SpotGamma Imp. 5 Day Move:||4.38%||4417 (Monday Ref Px)||Range: 4224.0 | 4610.0|
|SpotGamma Gamma Index™:||-1.66||-0.55||-0.46||-0.04||-0.20|
|SpotGamma Absolute Gamma Strike:||4400||4500||440||14000||350|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4496||4537||0||0||0|
|Put Wall Support:||4400||4400||425||13500||350|
|Call Wall Strike:||4600||4500||460||14250||400|
|CP Gam Tilt:||0.66||0.56||0.5||0.7||0.42|
|Delta Neutral Px:||4512|
|25D Risk Reversal||-0.09||-0.09||-0.11||-0.1||-0.11|
|Key Support & Resistance Strikes:|
|SPX: [4500, 4450, 4400, 4300]|
|SPY: [450, 440, 435, 430]|
|QQQ: [360, 350, 345, 340]|
|NDX:[14300, 14250, 14100, 14000]|
|SPX Combo (strike, %ile): [(4519.0, 75.05), (4391.0, 8.31), (4339.0, 9.1)]|
|SPY Combo: [434.0, 439.25, 429.19, 434.87, 430.07]|
|NDX Combo: [14031.0, 14445.0, 14245.0]|