Informe Option Levels

S&P futures are flat at 4133, with NQ futures off 65 bps to 13,214. The S&P

Call Wall

s have rolled higher, to SPY 410 (4115), and 4150 SPX. These are the key overhead resistance levels for today. To the downside we mark support at 4050. 

With Friday’s move higher, we look for

vol

atility contraction to start the week, due to the build in positive gamma and decrease in implied

vol

atility. 

Friday’s sharp move higher pushed the market through our key resistance level of 4080 (SPY 407), right up into the 4100 level. However, we did not see a huge meaningful demand for new call positions. It appears most of the

vol

ume was “day trading”, with 0

DTE

a fairly large 44% of SPX session

vol

ume. You can see the lack of change in call open interest plotted below (green) – note the chasm between the +1% S&P move higher and flatlined call open interest. 

To this point, 4100 was the dominant

vol

ume strike on Friday, with a very large 165k call

vol

ume, but only a 250 lot change in open interest! That is a remarkably low change in

OI

for such large strike

vol

ume, and reiterates that very heavy day trading activity. Additionally an increase of 25k puts were added to the 4100 strike, which is why we now see the

Call Wall

at 4150. On the SPY side we did not register particularly large increases in call interest, with the largest being an increase of 42k at the 420 strike. It appears that the SPY

Call Wall

rolling higher (like the SPX

Call Wall

) is more the result of in-the-money calls being closed out, vs large build at strikes overhead. We see the same thing in QQQ – with a very large 300k in call

vol

ume (shown below) at the 320 strike, and a decrease in

OI

of -25k at that strike. 

The point here is that whatever drove Fridays rally (month end flows, JPM hedging, 0

DTE

, etc), there was a noticeable lack of demand to hold call options at these equity levels. Friday also brought another drip in

IV

, which (on a 1 month basis) is down at 1 year lows (white line). This suggests that traders see very little risk going forward. 

The summary here is that the dynamics we discussed on Friday (overhead resistance, and “cheap”

IV

) appear to be in play this morning. Our vanna model now suggests that any decrease in

IV

will not serve to push markets higher. You can see this as to the right of the red line our purple

IV

adjusted delta model turns higher – which suggests that dealers need to sell into incremental rallies. 

Further, we noted that we wanted to see calls added at strikes overhead as a signal that traders were looking for an additional rally. It’s hard for us to make this case given this mornings data. Because the

Call Wall

s rolled higher our models are not officially “overbought”, but we maintain our view of consolidation to start this week, with 4050 the first downside target. 

Zooming out, 4000 likely remains longer term large support down below. Some consolidation here could allow for options positions to re-base, and if options positions can fill into the 4000-4100 range, it would be a healthy development for bulls into April options expiration. This is because larger positions here may reduce

vol

atility, which is generally seen as a bullish development. Further it’s unlikely that any open interest is lost before April monthly expiration. Ideally we see this basing, and also see calls to build up at strikes >=4100 as a signal the rally will resume. 

We do maintain a bullish overall stance in markets as long as the S&P holds the 4000 level. Below 4000 is where risk rises meaningfully, as

IV

likely snaps higher and dealer hedging flows come into the onset of negative gamma. The risk here is that open interest builds up in the 4000-4100 area which ultimately serves as a “cap” into April OPEX. This is why monitoring the buildup of positions here is critical. 

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