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 15 handles lower to 4,138. Key SG levels remain unchanged, with first resistance at 4,130 (SPY412), followed by more material resistance at 4,150 – 4,160 (SPY 415). Support below shows at 4,100. We look for low volatility in todays session.

Options prices are modestly elevated as we March into tomorrows CPI at 8:30AM ET, but we do also flag the headline risk from today’s 4PM ET White House meeting between Biden & McCarthy.

Outside of the headlines, traders are not expecting much from tomorrow’s CPI. As we’ve discussed previously, there has been a consistent trend of lower prices into these data prints, as shown below (h/t @RussellRhoades). Based on yesterday’s close the NDX straddle was pricing a ~1.1% move (ref 13,290, IV 19%). This is quite a decline from the +2%’s of the last 6 months. As you can see in the second plot, there were some nasty tail prints in Sep & Nov that caught traders underpricing CPI day volatility. As a result the Dec/Jan/Feb prints were all “overpriced”, and now things are moderating (at least until the next tail print).

“Overpricing” volatility is really not a worry in today’s market. Shown below is SPX term structure (white) vs 1 week ago (red), and as you can see IV has deflated for all dates

These are short dated games as traders see little risk before June. As we’ve touch on before, Debt Ceilings, recessions, etc are seen as “tomorrow’s problems”, and that is if they materialize as issues. However as IV drags lower vol sellers are getting less reward to take risk, and as a result they have to run for cover more quickly at the specter of risk. This creates jumps to the downside, as their covering exacerbates volatility (for more on this watch here).

At the same time the S&P is contending with the staunch resistance area of 4,150-4,200. This all aligns to make upside a bit less compelling in the short term, at least on the index side. For these reasons we have been favoring long expressions through megacap tech, which may not have to deal with the same “pinning” dynamics. Index puts are getting more interesting here, particularly as we head toward May OPEX.