Macro Theme:

 

Short Term Resistance: 4,500

Short Term Support: 4,425

Risk Pivot Level: 4,400

Major Range High/Resistance: 4,600 – 4,615 (SPY 460/SPX 4,600 Call Wall(s))

Major Range Low/Support: 4,400

‣ IV Ranking suggests many significant single stocks have their lowest IV’s in months, which may be an effective way to play directional movement out of 8/16 – 8/18 expiration**

‣ We look for market support in to Wednesday 8/16 VIX Exp, with 4,500-4,550 short term resistance*

‣ Current positioning suggests 4,400 would be a major interim low, with traders likely taking a directional cue from Jackson Hole on 8/24-8/26*

‣ <4,400 would be a significant “risk off” as dealer negative gamma increases*

*updated 8/14

**updated 8/16

 

Founder’s Note:

ES futures are flat at 4,452. Key SG levels are unchanged, with a band of support around 4,425, followed by 4,400. Resistance above is at 4,450 & 4,460 & 4,473. Despite the grind lower our daily open/close estimate is a tight 0.67%.

Levels are also unchanged in QQQ.

Put Wall

support holds at 365, with resistance at 367 & 370.

 

This morning we have VIX expiration at 9:30AM ET, followed by 2pm ET FOMC minutes. AM traders should be aware of jumpy movement around both of these times.

TLDR: We continue to see 4,400 as a major low, but are on the lookout for volatility to potentially tick higher due to the VIX exp and FOMC mins. <4,400 is were we view “risk off”, and would anticipate a meaningful shift higher in IV. As we outline below, IV seems cheap in both Index and single stocks which warrants looking at some long volatility positions as options expirations arrive today & Friday.

The VIX, currently 16.3, has most of its put interest at 15 and we think this has been serving to pin down volatility. With expiration the VIX is set to lose ~30% of total open interest, which eliminate some short volatility flows.

As the S&P is losing ground, volatility remains contained. These lower vol estimates have interestingly been foretasted in our volatility model (SG 1 day move), but also reflected in the flat IV’s. Below is SPX term structure for today (pink) vs 1 week ago (grey).

1 month SPX skew has also hardly budged, with today in pink vs 1 week ago in grey.

The options market is not reflecting much of any downside demand for lower equity prices.

Yesterday we discussed the ingredients for higher volatility. As we can see below, <440 in SPY (<4,400 SPX) the balance of positioning shifts to puts which should invoke volatility, as per our SG implied move which shifts higher <=4,400. Therefore 440/4,400 line of demarcation is where we shift from viewing the market decline as simple “consolidation” vs “risk off”.

With VIX expiration today and Friday’s OPEX should allow volatility to pick up. Volatility can play both ways, and the cost to express both equity upside & downside is arguably pretty low. For example Sep 15th expiration 25 delta calls are going for 12.5% IV, with puts 16.8% IV. Further, we were scanning some OPEX data by IV rank (coming soon to EquityHub), and the average rank is 17%. This suggests many large names have their lowest IV’s in the last year, for example: AAPL: 12% IV rank, TSLA 6%, AMZN 5%.

This low rank is a function of earnings passing, and traders not wanting to chase long calls here, nor wanting puts. The takeaway is that while we think Index IV is pretty cheap, you may be able to find even better pricing in high beta single stocks.

Note we’ve added 1 month realized vol, and 1 month implied vol into EquityHub for quick scanning.