Informe SG Levels

Futures were quiet overnight, holding Fridays close at 4170. The S&P maintains a “mild” long gamma position which equates to an estimated 1 day move of 80bps. QQQ starts in a negative gamma position which implies higher relative volatility. Today we look for resistance at 4194 and support at 4150.

This is an interesting juncture as two weeks ago when the SPX hit these levels, gamma was much higher and traders were pricing call options much more aggressively. You can see below in the risk-reversal metric that call prices relative to puts are off of recent highs. Additionally with this lower gamma (relative to 2 pre-April OPEX) we can anticipate higher volatility, which suggest markets have the fuel to push to new highs. Gamma is building up at the 4250 strike but still remains well below 4200. We will want to see that build to confirm the possibility of the SPX breaking 4200 resistance.

Looking at this through another lens, the consolidation over the past week helped to burn off “excess bullishness”.

To the downside, 4100 remains critical support. There remains little in the way of positions between 4100 and 4000 which suggests that “void” we referenced last week remains in play. As this major 4100 support is 1.5-2% below current SPX prices it would likely day 2 days of trading to test that level. In other words our implied move for today is only 80 bps, and so if there is selling today it would likely remain a contained “grind” lower.

On this subject we often get questions about these 1 & 5 day forecasts. These are based off of the historical forward return of the S&P from a given gamma level. Below are the distributions for today (1 day) and the week (5 day). We only produce the 5 day metric on Monday morning, so that traders can view our volatility estimate into Fridays weekly expiration.

You can see in the top figure (below) we assign a 1 standard deviation(SD) probability that the S&P closes within 80bps of todays open. In the bottom chart we give a 1SD estimate that the 5 day return (Fridays close) is within 1.83% of todays open. Keep in mind these are closing prices, not high/low. This is because we believe that dealers cause markets to mean revert, particularly into the close.  Therefore a sharp “extended” high or low is likely to be reeled back in as dealers adjust hedges.

Model Overview:

4000 – 4200 range into May OPEX. Gamma is currently moderate, and we see fairly low volatility unless markets break the 4100 level.