Informe Option Levels

Macro Theme:

Major Resistance: $4,150 – $4,160 (SPY $415)
Pivot Level: $4,100
Critical Support: $4,000 Put Wall
Range High: $4,150 Call Wall
Range Low: $4,000 Put Wall

‣ 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.

Founder’s Note:

Futures are lower to 4140, indicating a cash open near the major 4100-4110 (SPY 410) support. Light support below 4100 shows at 4075, then 4050. Resistance above is at 4130 (SPY 412), then 4150.

Yesterday, markets held a test of the SPY 410 area, buoyed by heavy 0DTE. We measured 49% of SPX volume as 0DTE, which is quite high (the record is 53%). Our view on 0DTE is that is serves to suppress volatility, and yesterday was a prime example of that. Below is 0DTE flow (teal line) from the HIRO S&P500 composite (combined SPX, SPY, ES). Marked in red are huge positive HIRO readings which imply a massive positive delta response off of those SPX lows (SPY 410 area). Traders bought calls and sold puts at 410, which pushes the market back up.

This flow is serving to keep realized volatility down, which of course serves to drag short term implied volatility lower. Below is a plot of several realized volatility windows over the past year and you can see how sharply 5 day (red) and 1 month (green) is dropping. These figures are being driven by the tight market moves around April OPEX, and bolstered by the fact that traders don’t see major risk in the next 30 days. Further, while traders used to assign high levels of volatility to various data prints (i.e. jobs, CPI), those anxieties have largely subsided.

With this, the response to any pop in IV is to sell it, as traders race to capture any perceived VRP. This becomes a feedback loop wherein there is an increasingly aggressive scramble to capture what little IV premium has appeared. In an effort to capture anything material out of selling options/volatility traders must bet on increasingly tighter market moves/lower IV. Its pushing on a string as eventually just a small trigger forces a short cover/normalization in IV’s.

In turn, this short dated IV crush appears to be increasing SPX & VIX term structures. Shown below is the current VIX term structure (grey) vs early March (blue). The current term structure is steep as traders are looking to sell short dated IV, but there are longer term anxieties, we think primarily around the debt ceiling. This backs the notion that traders do not see short term risks, but there are longer dated concerns.

Back to today we see futures sliding back to test that major 410 SPY level – a level which has been successfully supporting markets for nearly 2 weeks. As we’ve written several times over the last several notes, we have anticipated a test below 4100 for this week, which would link to an uptick in implied volatility. This could catch many of these short term, short IV players offsides and lead to a fairly quick flattening of that volatility term structure. We do not see a March style volatility move, but more of a mean reversion. The chances of this outcome increase with a break of 4100, which could lead to a quick test of 4050.

To the upside we continue to see the market struggle with 4150. There is a consistent grab for short dated negative deltas (call selling/put buying) at those levels, and, as discussed yesterday, a lack of more call buying at higher strikes.