Informe Option Levels

Macro Theme:

Major Resistance: $4,150 – $4,160 (SPY $415)
Pivot Level: $4,130 (SPY $412)
Interim Support: $4,100
Major Support: $4,000
Range High: $4,200 Call Wall
Range Low: $4,000 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 marginally higher to $4,135 ahead of this mornings 9AM ET VIX expiration. Key SG levels remain unchanged, with SPY 412 (SPX 4130) the largest “magnet” level on the board. Support below remains at 4110 (SPY 410) – 4100, and resistance is at 4150.

For several weeks we have been of the view that there may be weakness out of May OPEX, and that window starts to open with today’s VIX expiration. In our view today marks the shift of positions which have been pinning the market to the 4100-4150 area. With this, those very consistent S&P support and resistance lines from the last several sessions may have reduced strength.

The two levels which we think have been really containing things since March have been SPY 410 & 412, which are highlighted below. Between today and Friday we estimate 30% of total open interest at these strikes to expire, which should reduce the forces pinning the S&P down.

Our view of market price action has been outlined in this map below (from 5/10 note), and that view remains unchanged. There were two conditions for “risk off”:

Price risk: A break of 4100
Time risk: VIX exp & OPEX removing positions

Accordingly, we are looking for markets to test the 4050-4000 level next week based purely on OPEX dynamics, with 4000 being a massive options strike (which likely invokes some initial support). Further downside is likely tied to the scale of debt ceiling drama. For more on this topic see yesterdays AM note.

The upside cap for SPX remains at the 4200 Call Wall, and we continue to favor the popular mega-cap tech names to express upside.

Connected to these tight trading ranges has been the 0DTE phenomenon, which we believe has been suppressing volatility (full breakdown here). Some recent bank research has come out which supports this view (via ZH), and we find this chart from Nomura particularly interesting. It shows that mean reversion is a stronger feature in current markets vs any other time in the last +3 years.

Highlighted in yellow is where daily SPX options began trading trading (Monday & Wednesday started April ’22 + dailies Sep ’22). Recall that during this period the S&P made multi-year lows into October, so this change in behavior occurs in the context of large market swings.

However, 0DTE is a relatively new addition to markets, and so we’ve not been able to measure the impact through many different market environments/cycles.

To this point, the chart below shows the intraday trading range for SPY (SPX high-low vs open), and as you can see its been a very strong trend toward tighter ranges since 0DTE was launched. As noted above this period also marked major October equity lows, after which stocks have performed very well. There is certainly correlation, but its hard to certify causation.

The one period of major volatility was during the March banking crisis, and we noted that 0DTE seemed to subside vs longer dated tail hedging flow. That being said, it is interesting to note that the March daily ranges (above) seemed fairly muted given the VIX hit 5 month highs. We’ve also seen evidence of what seems like traders using 0DTE to hedge out large market moves (i.e. buying 0DTE calls after large gaps lower), which arguably suppresses volatility – just on a different scale. Applying this to today’s markets, traders may want to be aware of the propensity for intraday bounces, even if there is a strong day-to-day trend.

The risk, of course, is that 0DTE is weaponized and used to drive markets lower (i.e. everyone goes long 0TE puts). However, because these options expire each day its unlikely that “weaponized impact” would last over multiple sessions.