Macro Theme:

Short Term Resistance: 4,400

Short Term Support: 4,350

Risk Pivot Level: 4,500

Major Range High/Resistance: 4,500 SPX Call Wall

Major Range Low/Support: 4,370 SPY 435 Put Wall

‣ Catalysts this week: VIX Exp & FOMC (20th). *

‣ Our trade is to enter “long volatility” positions out of CPI & into FOMC, with current ATM IV’s for a 30 day SPX option ~12% (too low, in our view). A bullish CPI/FOMC could produce a sharp upside shift, in which case we’d target >4,600 into the end of Sep. A bearish reaction could move the market <4,400. We think the market is underpricing market movement out of these events.*

*updated 9/18

Founder’s Note:

ES futures are higher to 4,482. Our SPX levels for today are:

Support: 4,336, 4324 & 4,400

Resistance: 4,350 & 4,400

Our daily range estimate holds at 0.82%.

For QQQ, support is at 350, with resistance at 360, then 370.

In yesterdays webinar we discussed that the change in VIX from pre-FOMC to midday on Thursday was due to the “fixed strike slide” (see video clip here). This slide implies that the increase in VIX is simply due to the market decline, and not a pickup in demand or actual fear. Essentially the VIX has a higher weighting to ATM SPX options, ~30 days out in time. As we all know, options at lower strikes in the SPX have higher IV’s. Therefore, we can have situations wherein the VIX increases just because the SPX declined, and the ATM option goes from, say, 4,450 to 4,375. Since 4,375 has a higher IV than 4,450, the VIX goes up because that new, lower 4,375 option has a higher IV.

This is the value of monitoring fixed strike vol. Here our fixed strike vol dashboard, currently in development. What is shows is the change in IV for a given strike on a given expiration. In this case we are comparing 2 days ago (pre-FOMC), to this morning. What you can see is that short dated expirations have a decreasing IV into the face of a declining market (yellow box). For expirations >October, there is a mild increase in IV’s, particularly for strikes >=4,350. This reads like there were the short dated put sellers into weakness, with some buyers of longer dated calls.

This seems to match what we saw in

HIRO

flows yesterday. Here, we see that 0DTE put buyers (light blue) were flat on the day, up until 2PM wherein they turn to buyers. Our guess is that those whom shorted puts earlier covered as the market turned lower. We also see that into that 2PM hour the put buying from longer dated expirations picked up sharply (dark blue).

On the call side, 0DTE clearly tried to buy the dip (green). This could not only be from speculation, but also hedging flow as, for example, if you need to hedge some negative delta, some 0DTE calls may cover some negative delta exposure.

Our point with all of this is that this is not a fearful market. IV’s are mildly provoked, but not really moving, and short dated options traders are out, actively seeking to play the countertrend (both directionally, as well as in the vol space). Again, a lot of these 0DTE’s could be hedges, but if/when they turn in the prevailing market direction volatility could increase.

What this also points to is that continued selling is likely to be a grind, rather than a flush. As we remarked yesterday, this has implications for how you want to short (if you do want to short).

Finally, we’d note that we are seeing a lot of signs that a move under 4,300 into 9/29 could prove to be a short term low in markets. One of our favorite “bottoming” indicators are the Tilt metrics, which show

call gamma/

put gamma.

As you can see here, there is a lower bound in this metric which is often associated with market lows. Typically this metric bounces after an options expiration, wherein large amounts of put gamma expires. This could sync for both a price & time low into end of month.