Informe Option Levels

Macro Theme:

Major Resistance: $4,200
Pivot Level: $4,150
Major Support: $4,100
Range High: $4,200 Call Wall
Range Low: $4,000 Put Wall

‣ We look for markets to consolidate into the 5/3 FOMC
‣ Bulls may have an edge into May OPEX, as low IV + positive gamma serve to support equities

Founder’s Note:

Futures are down fractionally to 4178. The news many are discussing overnight cites Yellen cautioning on debt limit issues by June 1, which may pull the window of a possible US default forward. Major SG levels are unchanged, with 4150-4160 (SPY 415) being the key pivot area. Support below shows at 4115 (Vol Trigger, SPY 410), then 4100. Resistance above 4160 shows at 4200. VIX, 16.5, is stable at 1 year lows. We anticipate a low volatility session.

First, in regards to the debt ceiling issues, we suspect there are a lot of politics involved here, and with futures & IV unchanged overnight the Yellen update is more of a discussion point vs hedging event. Through our options lens this is interesting in relation to what we spoke yesterday. This is when perceived risks are “tomorrow’s issues” and low vol/stable equities persisting longer than what many think are possible. We also talked about how volatility seems to “jump” out of these low vol periods – sometimes triggered by options expirations (eyes on May 19th).

To get a better idea of where we stand, we present SPX skew for options 3 months out. The X axis is delta (“DP” = delta put, “DC” = delta call), with Y axis IV. Today’s skew readings exhibit low put IV, and low call IV. This suggests a general lack of directional demand, or at least a very balanced demand. The red line is Feb 2nd, which was a bullish blowoff that featured one of the highest call volume days ever. Accordingly, you can see the upside calls have a higher relative IV vs today. On this point, upside performance in this market is being driven by a select few entities like MegaCap tech, and so we favor these names as our choice of upside expression (MSFT, AAPL, NVDA, etc).

To the downside we plotted March 13th skew, which was the Monday of the SVB blowup, and recent SPX lows of 3800’s/VIX at 30. As you can see the IV’s are elevated across the board, which gives you an idea of relevant “crisis IV’s” for longer dated puts. The point here is that IV is currently relatively low, which suggests that bearish narratives are not making their way into demand for downside hedging. These dynamics could certainly change with Powell tomorrow, but things seem stable at this moment. If things break, we think that long vega feature of longer dated puts is where you want to be, as volatility should perform better on a drawdown here vs ’22 drawdowns.

Turning back towards the short term, SPY 415 (SPX 416) is a very large gamma strike, and the market has been mean reverting to it over the last 2 sessions (SPY $415 pre-market). No large piece of this expires in the near term, and so it likely remains in play for the next 1-2 sessions.

A positive-Powell tomorrow likely serves to create 415 as a longer term support base, while a bearish reception to Powell likely invokes 415 as resistance moving forward. Although we do suspect that, given the low IV, a bearish Powell will invoke immediate tests of 4100. While we continue to hold a bullish edge through May OPEX, a break of 4100 is “risk off”.