Informe Option Levels

Futures are unchanged over the weekend, near 4130. 4100-4110 (SPY 410) remains the major resistance/pivot area. This is followed by 4135 & 4150 resistance (SPY412). A support band shows in the 4060 (SPY 405)/4055 (

Vol Trigger

 

)/4050 range. Combining the low

IV

 

environment with high positive gamma positioning serves to drive mean reverting order flow, and low realized

vol

 

atility.

 

We note both the SPY & SPX

Call Wall

 

‘s have shifted higher to 420/4200. This shift appears to be from the light addition of call positions at 420/4200, vs the reduction of calls (and/or addition of puts) at lower strikes. We generally consider higher

Call Wall

 

s a bullish development. That being said, the SPX has yes to test the 4150 SPX

Call Wall

 

which was in place for most of last week. Further, 4150 still stands as a prominent upside level, and we continue to see the best upside case here as “grinding higher” which implies that, in a best case scenario, it takes several sessions to test up into the 4200 are

 

As previously discussed, we have not seen calls meaningful build >420/4200 level over the past year as rallies seem to stall in the 4150-4200 vicinity.

On this theme of positions/demand historically drying up into 4200, we are seeing a sharp decline in options demand as the SPX tests 4100. Shown below is data from the OCC which depicts a decline in total options buying premium for puts & calls, across equities/ETF’s/Indicies (please go to the “Sentiment” tab to view the details of this chart). This is not simply a phenomenon of Friday being closed – this buying contraction started in late March. While traders do not seem to be interested in buying calls in this price area, they do not appear to be interested in downside protection, either. We’d also note that as

IV

 

dries up, we are not seeing large options selling demand. Things appear to be at an impasse.

 

Its quite reasonable to think that this stalled condition can last for some time, particularly as

IV

 

declines and positive gamma builds. Both of these conditions support price pinning/grinding at the Index level. If we look back to February, we can see a strikingly similar condition wherein prices exploded into this same 4100-4200 price range, only to stall and pin for 2 weeks into Feb OPEX. We still have 2 weeks to April OPEX, which would the first clear catalyst to remove the large options positions that have built up (& are being added to) at nearby strikes. Even if markets take a bullish tilt from a positive CPI reading (4/12), we think traders will opportunistically sell calls into 4200 which combines with a further contraction in

IV

 

to stall out rallies. For these reasons we continue to think that traders are better off playing longs in single stocks, and not Indexes.

 

To the downside we still hold a lot of supportive positive gamma padding down to 4000, and therefore we think that markets have minimal risk of a left-tail move until 4000 is broken. While we think that

IV

 

over the longer term is cheap, its clear that current options positioning is suppressing

vol

 

atility. Its not until <4000 that we see negative gamma combining with higher

IV

 

(vanna) to drive realized

vol

 

atility. The issue here is that it would likely take several sessions to grind down into the 4000 level before larger directional moves come into play (this is vs quick/large 1.5-2% moves that we can see in negative gamma/high

IV

 

environments).