Informe SG Levels

Futures are at 4090 after holding 4110 for most of the overnight session. We are looking for a volatile day, with our SG implied move at 1.7%. 4100 is the key large level, with 4140 resistance and 4040 support.  Gamma officially remains negative under 4130, but we continue to hold 4100 as the critical risk line.

The flows from yesterday show us that traders took the early dip to close out put positions, as shown below. On net puts above 410(SPY)/4115 (SPX) were closed out.  Puts were net added at strikes below that level, however in the money puts have a higher delta. So when those are closed out dealers may have a decent amount of short futures to cover (full data here under “SPX Open Interest (OI) and Volume Adjustments”).

There are essentially two levers we are watching here:

1. Because all indicies are in a negative gamma position, that implies put gamma is in control. With this we see ~25% of total S&P and ~30% of QQQ gamma expiring tomorrow. If markets start off quietly, then put decay may spark and keep a bid in markets as dealers cover shorts (this decay is charm).
2. VIX/implied volatility(IV) is high. If VIX/IV breaks down then that will cause more rapid decay in puts, adding to a market tailwind. Conversely if VIX/IV spikes then dealers need to short futures (this is vanna).

If selling doesn’t materialize rather quickly today then this put decay vanna/charm combo could lead to a rally as dealer short hedges. We’d look at any rally as a function of “short covering” vs real buying which could lead to an air pocket into next week. We also note that next week is post-OPEX and so the window opens for more sustained volatility.

Below we’ve posted our “Gamma Tilt” metric. We don’t talk about this too often, but occasionally it catches our eye as it has done now. What we measure here is the ratio of call gamma: put gamma, and what you can see is that has dropped sharply.

Quantitatively we have not found a consistent signal from this metric. Qualitatively when that ratio drops with stocks at all time highs it seems to foreshadow market drawdowns. Essentially what the ratio is saying now is that “call positions have declined substantially versus puts”. That is an odd thing to see with stocks within a few percent of all time highs.

Model Overview:

4100 is the critical risk line into Fridays OPEX. Below 4100 is a high risk, negative gamma market position.