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
‣ Equities may enter a “window of weakness” starting with 5/17 VIX & 5/19 OPEX

Founder’s Note:

Futures are lower to 4125, which is right at the large SPY 410 level. SG levels are unchanged with support is at 4110 (SPY 410) – 4100. A break of 4100 likely invokes a test of 4050. To the upside we have resistance at 4130 (SPY 412), followed by 4150.

While the chatter is about CPI, the options market remains in fairly low IV mode. Today’s 0DTE straddle priced at 90bps (ref: 4115, 33% IV). Further it seems that US politicians took a “nothing done” last night, and punted Debt Ceiling discussions Friday.

As far as positioning goes, the dominant theme is that volatility (both RV & IV) are at or near 1 year lows, which makes short vol materially less compelling. However, we note that both SPX put open interest & VIX call open interest is at all time highs. The other interesting development is that for the first time since Jan ’22 we see SPX put open interest (red) materially > SPX call open interest (blue). It’s possible this is a function of traders having shifted equity exposure into stocks (i.e. “re-grossed” vs hedging the upside with calls), but this call open interest also fades right as the SPX hits the longer term resistance point of ~4150.

The bullish argument around the SPX put & VIX call interest is that the record positions suggest the market is well hedged for downside risk. Bulls may now be able to also make the case that the market isn’t prepared for a surprise to the upside, based on the fade in call interest. We’d note that a similar divergence isn’t as apparent in QQQ, but we do see a modest “call fade” in AAPL, MSFT, NVDA, AMD, etc. These stocks are all at major highs.

We’d argue that the “risk off” hedging positions are only bullish if/when the positions are closed. In fact, the existing positions may speed up any downside response (i.e. higher vol of vol), as dealers add downside hedges into weak markets. A trigger is however needed to both invoke additional tail hedging and wake up existing downside bets, which is why the Debt Ceiling is of such focus.

Our current outlook for the market is mapped out below. There are two bearish cases – one price based and the other time based. The downside price case is on a break of 4100, and we also think markets enter a window of weakness starting with next weeks VIX exp + OPEX (5/17 & 5/19). We see 4000 as a max downside into next Wed/Thursday. The “riskiest” scenario is markets staging near 4000 into May OPEX, as a bearish Debt Ceiling headline could play into meaningful negative gamma <4000. The upside case remains capped by the 4200 Call Wall. Should that wall roll higher, then we would model for additional market upside. At this moment we do not see signs of the Call Wall rolling higher, but that likely wouldn’t appear until/unless the SPX moves >4150.