Informe Option Levels

Macro Theme:

Major Resistance: $4,150
Pivot Level: $4,100
Major Support: $4,000
Range High: $4,200 Call Wall
Range Low: $3,900 Put Wall

‣ A break of 4100 is “risk off”, likely invoking a test of $4,000.

Founder’s Note:

Futures are flat at 4100 as traders await the 8:30AM ET Jobs report. SG levels are unchanged, with a resistance/pivot at 4100-4110(SPY 410), followed by resistance at 4130 (SPY 412). Support shows at 4050-4060 (SPY405), then 4000.

Implied volatility has now staged higher, with the VIX back to 19.3. Shown below is SPX term structure which has shifted higher, and the curve has flattened out vs one week ago (red). We do not read this as a fearful state, but more of a normalization/snap back to the typical IV levels seen over since Jan ’22. If you’re a bull you may see this as a bit of extra vanna fuel to pop markets higher, and if you’re a bear you see a loss of gamma support with an IV kicker at-the-ready.

To this point on loss of support, below 410SPY/4100SPX we see mainly put positions (blue bars) which is why we hold a “risk off” stance <4100 but with large support at 4000. Similarly we are bearish in the QQQ <320, and look for first support at 315.

It certainly feels like upside momentum has been lost, and the thing that strikes us so far is that we have not yet seen a strong response from new downside options bets. The concern here is that if put buying does materially increase, it will pressure a weak market. The counterpoint is that traders are already hedged, as suggested by near record VIX call & SPX put open interest. You can see that SPX interest below (blue), with the fairly average put volume (red).

Additionally we think its interesting that the equity space is seeing heavier rates of relative put open interest (blue) as shown by the equity put/call ratio. Again, this may support the argument that traders are hedged.

Hedged/unhedged matters in regards to the speed of a downside response. In our view the elevated levels of open interest implies higher “jump risk”, as there is incrementally more gamma/vega to hedge as markets go lower. Some argue that this high level of OI is what led to the speed of the March bank-crisis-drawdown & magnitude of the vol spike. The benefit of the existing open interest is that traders can close hedges into weak markets, and that can lead to price support as downside hedges are unwound by dealers. However, in this situation markets may need a catalyst to spark reflexive downside movement.

Incremental new put positions could illicit larger selling which sparks more immediate downside hedging flows. Hedging flows in response to put buying/call selling can be the catalyst to move markets lower. The point here is that we do not think this is a ’22 “grind down” situation, and the chances of a very quick flush are quite elevated if the SPX is <4100, and that risk rises incrementally on a break of 4000.