Macro Theme:

Short Term SPX Resistance: 4,569

Short Term SPX Support: 4,525

SPX Risk Pivot Level: 4,500

Major SPX Range High/Resistance: 4,600

Major SPX Range Low/Support: 4,200

‣ IV levels are anemic (~8%), which suggests that a pop higher in IV/equity downside is due. A break of 4,500 is our “risk off” level.*

‣ 4,600 is our current max upside target, as call positions are not yet building above that level.*

*updated 11/30

Founder’s Note:

ES Futures are flat at 4,575. Key SG levels for the SPX are:

• Support: 4,540, 4,513, & 4,500
• Resistance: 4,577, 4,591, 4,600
• 1 Day Implied Range: 0.64%

QQQ support is at 387 & 385. Resistance is at 390 then 495.

Powell speaks today at 11 AM EST.

Mean reversion continues to the prime feature of these markets, as the SPX seemed poised to shift lower before being kick-saved by a 30 handle SPX rip into the final 30 minutes of yesterdays trading. Its worth noting yesterday was the final day of November, with month-end flows likely material.

In yesterdays Member Q&A we discussed how reminiscent this price action is of Nov ’22 (below), wherein there was a strong Nov market rally, and then a period of consolidation at the start of December. As we continue to look for a test of 4,500, we think this analogy is helpful.

Onto the options data, gamma continues to be build at nearby strikes, with SPY 455 being the largest S&P500 strike on the board, followed by 460 SPY & 4,500 SPX. These large positions imply that hedging flows should continue to suppress volatility in this 4,500-4,600 range, by driving mean reversion (dips being bought, rips being sold). We believe these options positions continue to create a particularly sticky upside in the S&P, and there is not vanna fuel to help push markets higher. Buyers need to step in from outside the options market.

As daily ranges continue to be tight, forward volatility expectations drain. This can be seen in the skew from the large DEC OPEX, which today (pink) vs 11/30 (gray). This IV crush is what results in lack of upside vanna fuel. However, vanna materially pushing downside is in play for the SPX, wherein any material SPX move lower would result in a spike in IV, which would likely drive dealers to have to short deltas (i.e. sell equities/futures). We think this scenario comes into play on a break of 4,500.

In an effort to see both sides, one could make the case that the IV lows are now being normalized by lower realized volatility. 1-month SPX realized vol(RV) is now down to 11%, with 5 day realized vol at 3%. Comparing this 1-month realized vol to the VIX of ~13, we can see that the spread between RV and VIX is working back to its longer term mean (red line). In other words: VIX is pretty fairly valued given the lack of SPX movement.

The problem with this is that all of that sticky upside gamma does not go away until Dec OPEX, and we think the scenario of the S&P maintaining a 3% RV (as seen in 5 day RV) over the next two weeks is not worth betting on – literally.