Informe Option Levels

Futures are flat to 3850 ahead of the 8:30AM ET CPI. Key levels are unchanged with the exception of the higher Vol Trigger (3805). This metric sliding higher suggests an increase in put gamma positions. Support today shows at the 3834 and 3800 strikes. Below there we see another level at 375SPY (3755SPX). To the upside, major resistance does not show until at 3900 (Call Wall).

The positioning dynamics outlined in yesterdays AM note still stand for today. We historically wouldn’t even mention a GDP reading, but now those readings (like CPI’s) are potential volatility triggers in this illiquid environment. We have no opinion on what the print will be (nor how the market will react), but must respect that tail risk of sharp downside.

Further, our critical support line (Vol Trigger) has been working its way higher along with the market. This is expected behavior, and highlights that a break of 3800 leads to an air pocket underneath.

We note too, that once again (as with Tuesday), the S&P charged into 3900 but the Call Wall did not move higher. Traders do not appear to be looking for more upside over that level.

The predominate themes we’ve been covering are the rise of 0DTE options trading, and the extremely flat skew. To this latter point, our RiskReversal metric closed at -0.03 which is the highest in 2 years. This is a signal that put values are low relative to calls – and this comes from call buying and/or put selling. (We’ve been of the opinion that it has more to do with put selling in a high vol environment vs ferocious call demand).

Regardless, there is a risk embedded in this – and that is the “steepening” or buying of skew. If the dynamic changes such that puts go bid and/or calls sold that foists negative delta hedging requirements onto dealers which could be impactful. Further, that’s likely to happen into an environment with rising IV (adding to downside pressure). As we discussed yesterday, the issue is that there seems to be very little flattening left for skew (i.e. our RiskReversal shifting more toward 0), particularly before the FOMC on 11/3. For now, this shuts down the equity tailwind, particularly with the Call Wall at 3900.

Certainly an accommodative Fed would keep the upside momentum in tact, but the shorter term dynamics seem to present a bit more risk than reward.