Futures were flat overnight, holding 4125. 4100 – 4110 (SPY 410) is the pivot level, with resistance above at 4141, then 4150. Support is at the 4055 area which is a meeting of: Vol Trigger, SPY 405 & SPX Large Gamma 4050 SPX.
We now see some fairly large gamma bars forming overhead, and the SPY Call Wall contracted from 420 to 414. Of particular note is SPY 410, which has formed large positions (left chart) which helps to establish this is a pivot/pin area. This is then followed by several large gamma SPX gamma bars at upside strikes, including the 4150 Call Wall (right image). In line with our discussion yesterday morning, this creates sticky upside which slows upside momentum. Further, IV is at lows which zaps any type of vanna tailwind, and charm is a non-factor with expiration several weeks away.
The vanna model reflects both the delta & implied volatility dynamic in the S&P. Note to the right of ~4115 (SPY 410) we see that both pure delta (grey) & our IV adjusted delta (purple) start to increase. This suggest that long delta exposure of liquidity providers (dealers & market makers) is increasing as the market rises. The implication here is that futures need to be sold to hedge into upside SPX movement.
There is something about this 4150 area which has, outside of a brief August break, capped the S&P upside for over a year (SPX in orange). These S&P 4150 area peaks coincide with lows in 1 month IV (white), which has been consistently “bouncing” at 16%. While technical analysis on IV measures (or the VIX, for that matter) will draw sneers from options aficionados, this IV of 16% represents 1% SPX daily moves. As SpotGamma readers know, 1 month S&P realized volatility has not been under 16 since early in January 2022. Its fair to say the world has changed quite a bit sense then, which has been producing higher levels of volatility. IV <16% has been too cheap. While “long IV not paying” has been a recent theme, we’re not so sure you want to be short it here.