Informe Option Levels

Futures have popped higher to 3730. Resistance shows at 3725 (Vol Trigger) then 3800. Support shows at 3700, then 3649. The Put Wall has rolled up to 3600 (from 3500) which is statistically a bullish signal. We also see the Vol Trigger & Zero Gamma points sliding lower which suggests calls building.

Our view has been for a large directional setup out of CPI into Fridays OPEX, with a bullish edge due to vanna & charm. Friday’s slide down initially put a dent in that thesis, but price action yesterday into today seems to suggest that OPEX rally is still in play. This idea strengthens if/while the S&P is over 3700 support (Absolute Gamma Strike), and therefore should elicit large two-way hedging flows. Essentially we view it as a strike for pinning, however we have large puts <=3700 which tilts the board in the favor of bulls as these puts decay into Friday.

The thing which catches our eye this morning is the Risk Reversal metric, which is -0.04. This is the most bullish reading we get, which is often seen when we are near market highs. This is because at highs, put values are crushed relative to calls (skew flattens). However, as you can see in our chart below, this bullish reading has popped up several times recently… when the market bottomed.

Interestingly, the OCC data from last week shows that there was huge size in put shorting (i.e. selling to open) into last weeks fresh market lows. You can see this in the gold line below – but also note index (red) and ETF (brown) put shorting remained high. This data syncs with that of the risk reversal above, suggesting that traders are/were shorting puts and that is likely a key driver of markets.

As we have stated endlessly this year, markets rallying from put sales are inherently unstable, and we need to see call positions come in to quell volatility. The first sign this is happening is the S&P trading above the Vol Trigger (3725), which is where our longer term model flips from a bearish stance to a bullish stance.