Informe Option Levels

Macro Theme:

Major Resistance: $4,200
Interim Resistance: $4,150 – 4160 (SPY 415)
Pivot Level: $4,100
Critical Support: $4,000 Put Wall
Range High: $4,200 Call Wall
Range Low: $4,000 Put Wall

‣ $4,200 is likely heavy resistance into April 21st OPEX
‣ We look for markets to consolidate after OPEX & heading into the 5/3 FOMC
‣ 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.

Market Events | Estimated Earnings Dates

Friday, April 21 (monthly opex)
Tuesday, April 25 (before market close): PEP, V, MCD, VZ, UPS earnings
Tuesday, April 25 (after market close): GOOGL, MSFT, V earnings
Wednesday, April 26 (before market close): BA earnings
Wednesday, April 26 (after market close): META earnings
Thursday, April 27 (before market open): MA, LLY, MRK, ABBV, CAT earnings
Thursday, April 27 (after market close): AMZN, INTC earnings
Friday, April 28 (before market open): XOM earnings
Tuesday, May 2 (before market open): PFE, BP, UBER earnings
Tuesday, May 2 (timing still unknown): AMD, SBUX, ABNB earnings
Wednesday, May 3 (after market close): QCOM earnings
Thursday, May 4 (after market close): AAPL earnings

What’s Happening in the Market

The walls are closing in on April opex. The SPY Call Wall lifted to 420, but perhaps more notably, the SPX Put Wall lifted to 4000, which initiated a tighter structural bind on price action than we have seen in recent weeks from the implied range of probable price movement.

Yesterday, we saw the VIX test a new low for the year, dipping to 16.17 on the intraday. Today it closed up a bit, at 17.17, which is still quite low relative to the past couple years (Its 52-week high is 36.64.) Combining this relative affordability of puts with anxieties over earnings confirmed with harsh price action for TSLA at the close, many rushed to buy puts on SPY and especially QQQ in that narrow window after the closing bell (major index ETF options are available 15 minutes after the close until 4:15pm EST).

In the bigger picture, what we see now is fear from both put and call holders. This is a trader’s market where there is little trust in trends and many or most are quick to take what profits they can. Let’s unpack that.

Equities were red in the premarket for a second night in a row. Also, once again, put holders were in a race to monetize these puts in the first couple minutes of the cash session. But then, put buying flows quickly took over and continued into the start of the power hour, until they finally unwinded. This put-buying challenged a strong bounce in equities until about 1:30pm EST, in which case the underlying finally dropped sharply to follow the put buying. But then when put buying began to unwind at the end of the day, the underlying shot up to VWAP with a nice little bounce into the close. This price action suggests that many or most traders are thinking alike right now, with likeminded distrust of trends and wanting to execute on mean reversion.

Gamma Spotlight

Today, one of our star members, Doug Pless, hosted a webinar sharing some trading insights and an overview of how to use key levels for profitable trading. Thank you Doug! We should have a video up on that soon, but in the meantime we also hosted a webinar today on preparing trades for individual stocks in the wake of the April opex tomorrow. A replay of that and the key chart for it is available here: https://spotgamma.com/top-50-stocks-to-squeeze-into-april-opex/.

Options do not move stocks all the time. We want to pay attention to stocks which have strong [next expiration] open interest, which means the hedging impact should be sharp and decisive. We also look at the biggest call and put OI vs total OI to see how large of a part it is of the wider options complex. And of course we have the Call Wall, Put Wall, and Absolute Gamma to help find strikes of primary interest. These are all different types of peak gamma.

As a review, the Put Wall has the most negative gamma (put gamma minus call gamma), the Call Wall has the most positive gamma (call gamma minus put gamma), and Absolute Gamma has the most aggregate gamma (call gamma plus put gamma). The walls help to outline the most probable ranges of trading and then Absolute Gamma becomes increasingly interesting as we approach expiration since the price tends to gravitate toward that level (as a specific point within the range of the Put Wall and Call Wall).

Reflecting on Doug’s webinar, we addressed how the Put Wall and Call Wall tend to have different behaviors, with more snappy price action expected from the Put Wall. In general, put-dominated regions usually to have this more reactive behavior. Looking at this Composite View of AAPL for example from our Equity Hub™, the region in red is dominated by put OI and the region in green is dominated by call OI. The red regions tend to have short and powerful rallies while the green regions tend to grind up in extended rallies characteristic of a gamma squeeze.

Market Structure

The 4150 strike on SPX is stealing the show, which is that stubborn resistance that has historically been bound to a 16-VIX over the past several months. Immediately surrounding it, we see the market in a range between 4100 and 4200, with a very strong firewall at 4000 guarding against tail risk protection beyond that, keeping prices of tail risk protection low.

Conclusion

The way that that market has been systematically conditioning traders to buy dips and sell rips warrants grounds for caution: The crowd has a way of eventually losing. One day, after a long pattern of sine wave movement of chopping in a tight range, the price can just keep extending, like how it did in the recent rally before consolidating here. As traders we want to be smarter than mechanically doubling and tripling bets on mean reversion once the price starts running away in one direction. This is when traders tend to get hurt—either buying too much as it keeps dropping or selling too much as it keeps moving up.

From the wisdom of the Market Wizards, sometimes the contrarian move is to follow a trend because it is human nature to want to bet against overextended market movement, just like how instincts would generally want to bet extra heavy [illogically] on tails if a coin has already landed on heads several times. Arguably, one of the important steps that each trader must take in order to become consistently profitable is to reprogram unprofitable instincts from human nature by developing, evolving, and minding a set of disciplined rules; this includes knowing when to stop trying to be right and to acknowledge a pattern-breaking development.