Informe Option Levels

Macro Theme:

Major Resistance: $4,150
Pivot Level: $4,100
Major Support: $4,000
Range High: $4,300 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 higher to 4100 ahead of 8:30AM ET NonFarms. AAPL reported last night, and is up ~2% to 170. SG levels are consolidating around 4100 – 4110 (SPY 410) and that is the major resistance line for today. 4150 is the major level above there. Below we mark support at 4060 (SPY 405), then 4000.

This is a tricky spot to call for the S&P. On one hand we have lost 4100 support, and quickly tagged 4050. Implied volatility jumped higher, but the response of the downside was for traders to buy calls and/or close out puts. Further, a lot tech remained flat to positive throughout the session (ex: ARKK +2.8%). The names/sectors which have been weak continued their slide: fins -1.28%, retail -1.5%, energy -1.1%. The point is that yesterday was not a highly correlated selloff, and speaks more to a rotation. With AAPL being higher, we could see vol sellers pop out and give market a short term boost.

A decline in IV providing a tailwind for equities is framed through our vanna model. As you can see below, IV adjusted delta (purple line) is below that of “unadjusted” delta, which implies dealers may have some shares to buy if markets rally (for details see y’days Q&A). This fuel drains off around SPX 4150. Vanna does work both ways, and a further slide in markets brings higher IV’s, and more market pressure.

At current SPX levels, though, we don’t see options positioned to allow for a “full release” to the downside. Below are the large gamma strikes for the SPX, and as you can see there is a large amount of calls (orange bars) >=4100. This is our positive gamma zone. There is a little node there at yesterdays SPX low of 4050 (and more at SPY 405), but the giant strike rests below at 4000. A test 4000 strike likely draws a hedging response that leads to some support, but below there is nothing but put positions. Accordingly, that is where things could get nasty.

We have to work off that positive gamma and work down to final support. This reminds us of that old traders axiom that “topping is a process”.

You can see a similar process back in February. Note how SPX broke from 4100’s (green box) down to 4000 (yellow), and then rotated around that level until the bank crisis unleashed volatility (red). We feel its a similar setup here in that downside will have to “stage” at 4000 before a larger break.

For the upside, bullish options activity has consistently dried up at 4150-4200 and we see little reason for that to change in the next few weeks, which is why we have favored being long “the winners” like big tech vs S&P.