Informe SG Levels

Futures extended gains overnight to 4270.  Our models call for a lot of volatility today.  Markets open with a strong negative gamma position, with 4300 showing as the key gamma flip level and major resistance, with 4330 the only level above that.  Support shows at 4263, with 4245 the key “final support”. According to our EquityHub model, if that line breaks we may quickly see 4160.

The concern for markets is that yesterday appears to be mainly short covering. Little in the way of call positions were added, with 4300 now forming as the largest gamma strike. Therefore the entire options structure has essentially shifted down from the 4350-4400 area to 4250-4300.  While the VIX spiked, we see a fairly muted tick up in our Risk Reversal metric to 8, suggesting lighter demand than we’d expect (>10 is a bearish reading).

As noted last night it would make sense to see dip buyers rush in, and traders look to sell some relatively high volatility.  “Relative” is the key word, and our data seems to suggest that the market is now more exposed to blowing out the implied volatility/VIX high from yesterday. This doesn’t mean that sellers step up and press the issue, but it does mean that as long as markets are under 4300 its vulnerable to a steep gamma induced drawdown.

A push above 4300 repairs some damage and likely induces a larger “volatility smash” which can propel markets quite higher. Bottom line is this: respect the tails (both left and right) today, with 4300 being the critical bull/bear line.

Finally, you may recall yesterday we talked about these very strong positive delta readings we say with our HIRO indicator. Today we see in the open interest changes a rather remarkable image as shown below. According to this data there were a massive number of in the money calls closed out. We assume these were short calls that were bought to closed, and this is based from the fact that the HIRO indicator picked up all this volume yesterday as buying calls.

This suggests that a large player was quite active yesterday (recall this flow was very strong all AM, and shut off at 11AM per last nights note) and this likely provided a supply of positive deltas to the market. Whats very odd here is that this didn’t register as volume traded. I.E. the volume at the 4000 strike shows at ~5000, but ~30k of open interest was closed. We are asking around for some clarification here, but its a very curious data point(s).

Model Overview:

4300 critical resistance and the gamma flip line. Markets are bullish above there, bearish beneath.