Informe Option Levels

Macro Theme:

Major Resistance: $4,150 – $4,160 (SPY $415)
Pivot Level: $4,100
Major Support: $4,000
Range High: $4,200 Call Wall
Range Low: $3,900 Put Wall

‣ IV lows coincide with the $4,200 Call Wall to create $4,150-$4,200 area resistance into May OPEX
‣ A break of 4100 is “risk off”, likely invoking a test of $4,000

Founder’s Note:

Futures are unchanged at 4,150. SPX resistance above remains at 4,150 – 4,160 (SPY415). Support below shows at 4,130 (SPY 412), followed by 4,100.

The volatility crush is the main dynamic we are flagging for today. To this point, on Thursday the VIX highs were 21, but on Friday the VIX closed at 17. The effect of this is seen through our vanna model, as posted below. On Thursday (right graph), or IV adjusted deltas (purple) were plotted below that of standard delta (gray). This implies that dealers may have to buy back futures as the market rallies, because their delta exposure would decline with higher equity prices and lower implied volatility. Contrast this to the today (left graph), wherein the to models are much tighter which suggests that a decline in IV is not longer a dominant force. Further you can see that on rallies both the IV adjusted & standard delta models increase which may mean that dealers need to sell futures into rising markets.

The implications here is that as the market moves from 4,150 and into the 4,200 Call Wall, vanna drains off as a tailwind.

On the topic of resistance, the 4,100-4,200 range has been a topping point for rallies over the past many months. Most recently we tested this level in February after having a recording call volume day, and then a week ago when RV/IV hit +1 year lows. In both cases the options market offers a big tailwind, but there is just no follow-through. Relatedly, the 4,200 Call Wall has not budged on these rallies, which is due to a lack of call activity >4,200. For whatever reason, call activity dries up when we hit this range.

Based on our current models we continue see 4,150 – 4,200 as our resistance zone into May 19th OPEX.

If you look at what the SPX options are pricing it more or less syncs with that view of upside resistance. Below plots the implied probability of various SPX closing prices on a given expiration. We’ve marked 5% in black, and as you can see the options market prices pretty low odds of a break <4100 in through 5/19 OPEX. If we hold over 4100 for the next several days, we should see the probabilities begin to contract (i.e. greater kurtosis) around the 4150 line due to the charm/pinning effect of May OPEX.

Should we break 4100 it should continue to spark “jumpy” pops in IV, but those are likely to be met with volatility sellers and or some supportive flows. A full-bore “risk off” likely doesn’t arrive unless the S&P breaks below 4,000. Downside may be easier to achieve out of May OPEX (which is building large equity call positions), but there needs to be something to invoke “vega”, which breaks the backs of the short dated, reflexive vol sellers. The debt ceiling risks could flush these folks out, and we anticipate headlines increasing around this topic into June.