Informe Option Levels

Macro Theme:

Major Resistance: $4,200
Pivot Level: $4,150
Critical Support: $4,000
Range High: $4,200 Call Wall
Range Low: $3,800 Put Wall

‣ $4,200 is likely heavy resistance into April 21st OPEX
‣ High market volatility is unlikely with SPX >$4,000 due to positive gamma positioning.
‣ 1 Month IV is at lows near 16%, which is likely a long term low which reduces equity vanna tailwinds. It further implies that longer dated IV may be reasonably priced.

Founder’s Note:

Futures have consolidated some gains, down 40bps to 4160 ahead of the 9AM ET VIX expiration. For today we look at 4150 – 4160 (SPY 415) resistance, followed by 4175. There are multiple layers of support below: 4120, 4115 (Vol Trigger), 4110 (SPY 410) & 4100. With this we continue to look for low relative volatility, and tight, mean reverting price action.

We do not see a clear impact from this AM VIX’s expiration, although it is interesting that the VIX is poised to expire around 17.50 which shoves nearly all the open calls out-of-the-money (4/19 VIX OI plotted below). If anything, VIX expiration may help to relieve volatility selling pressure, which syncs with Friday’s expiration of large vol-suppressing equity positions. Accordingly, we remind readers that while equity OPEX is Friday, we have seen ranges associated with OPEX start to break down a day or two before. In other words: into tomorrow we start discounting the power of the OPEX pin.

Our view remains unchanged in that we are looking for some weakness in equity prices next week, with 4000 as major support. This view is based on the idea that this is a call heavy expiration, and the large, positive gamma padding currently supporting markets will be removed.

The chart below shows the delta notional tied to various expirations with calls in orange, and puts in blue. As you can see this is not an overwhelmingly large expiration, but it is unique in that there is a large net call position, which is associated with net positive gamma. Call-heavy expirations, which drive positive gamma, were the norm from April ’20 – Dec ’21. However, since Jan ’22 only Aug and Feb of ’23 expirations have had materially positive gamma.

Both August ’22 and Feb ’23 expirations marked equity highs and volatility lows, as you can see below (SPX top, VIX bottom). While there was just some initial consolidation following those expirations (which is our base case for this exp), there were major catalysts to drive equity prices lower 1-2 weeks after those dates. In August is was Jackson Hole, and after February it was SVB.

While we aren’t suggesting Powell triggers a washout on 5/3 FOMC, the timing certainly rhymes suggesting the window is open for a similar move. Further, it’s hard to not see the path of least resistance as equities lower/vol higher. With IV at these fresh lows, owning lottery ticket puts seems like a cheap bet, and we think the volatility carry is fairly easy to offset. All that said, we fully understand the bear camp is quite crowded, and our conviction is more about weakness next week, and then “wait and see” post-FOMC.

Finally we wanted to draw attention to this interesting chart (and thread) from @Alpha_Ex_LLC, which shows a changing dynamic in realized volatility. Last year was categorized by a lack of response in downside volatility (i.e. VIX underperforming when the market was down), but volatility seemed very responsive on upside equity moves (i.e. market up, VIX up). The prevailing idea here was that traders wanted to hedge right-tail risk via long calls. As the chart shows in orange, there was indeed a lot of market movement to the upside as traders were long calls (and apt to short puts).

As equities have been up strongly YTD, there is now less upside volatility – rallies seem to have “less punch”. We think this is an important dynamic to consider moving forward, as it implies that traders may now have more time to catch up to market rallies, whereas last year it often felt there was a penalty to not having enough upside exposure.

This is also relevant given the dynamics laid out above, as the market is at recent highs with implied volatility at +1 year lows. After the blistering January rally, the S&P has largely held 4000 with upside momentum persistently stalling into 4200 (which reduces realized vol). For various reasons (re-grossing, changing fundamentals, etc) there could be less right tail risk (and less chasing) with equities as current levels.