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:

S&P futures are flat to 4090, with Nasdaq futures up 75 bps to 12,903 after a strong earnings report from MSFT (+7% pre-market). Regional bank PACW is +13% after reporting last night – many were citing FRC as a catalyst for weakness yesterday (-49%). PACW may shift near term views that regional bank risk is more idiosyncratic, vs systemic. META reports after the close.

Key support below is at 4060 (SPY 405) – 4050, then 4000. A band of resistance above shows at 4100-4110 (SPY 41110), then 4130 (SPY 412).

Some post-OPEX weakness did arrive yesterday, along with a sharp move higher in implied volatility. Our view for the last several weeks was that we would get some equity weakness this week, and a shift higher/mean reversion in IV. Yesterday checked these boxes, as the SPX had its worst day since mid-March (1.58%). Shown below is one day moves in VIX, and as you can see below there was a rather significant VIX move to 20 as well.

Volatility tends to cluster, meaning its rare to have one material move higher in IV followed by immediate relative calm. This may be an exception given that IV had been stuffed so low, and we’ve now shifted back something more reasonable (see yesterday’s note).

As a reminder of how depressed IV was, we can see 0DTE straddle prices below (h/t GS via ZeroHedge). 0DTE straddles were pricing in paltry ~25bps moves on the session, and we saw many traders attempting to justify these levels by suggesting that RV should drag IV lower, and looking sell 0DTE. Even if you were correct the risk/reward was minimal.

Our current view is that the equilibrium of the S&P may now have shifted from the 4100-4150 range down to 4050 – 4100. Shown below is gamma by strike for SPY, with large put gamma at 405, and call gamma peaking around 410-412. While we were looking for a bit more downside follow through with a full test of 4050, MSFT may have offered a respite. This may be particularly true given that traders will likely attempt some short dated/0DTE vol selling.

Ultimately we are seeing that area >=4100 as resistance for today, and we are leaning towards that holding as resistance into FOMC. Again, we view weakness this week more as “mean reversion” vs “risk off”.

Term structure is now much flatter, and IV is likely to hold above recent lows until next weeks FOMC. What follows after FOMC is certainly less clear. As we discussed yesterday, traders aggressively seek out any perceived volatility premium to sell, and if the FOMC is benign we could see some fairly strong “pre debt ceiling” IV declines. Going forward we will be eyeing the 4100 level as our “all clear” for some upside, but not seeing a full “risk off” unless the major 4000 level is breached below.