Macro Theme:

Short Term SPX Resistance: 4,750

Short Term SPX Support: 4,700

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,750 (SPY Call Wall)

Major SPX Range Low/Support: 4,400

‣ We look for higher volatility this week (12/11), triggered by 12/12 CPI, 12/13 FOMC and into the huge 12/15 OPEX.*

‣ 4,750 is our current max upside target, due to a Call Wall shift on 12/13. Call Walls in QQQ/IWM are at 400/190.*

‣A break of 4,700 is our “risk off” level.*

‣ January OPEX is setting up to be a major event, with a risk that expiring large long call positions could pull markets lower into mid-January.*

*updated 12/13

Founder’s Note:

ES Futures are fractionally at 4,775. Key SG levels for the SPX are:

• Support: 4,700, 4,693, 4,674, 4,650
• Resistance: 4,726, 4,750
• 1 Day Implied Range: 0.66%

QQQ resistance is at 405, support is at 400, then 397

IWM resistance is at 200. Support is at 190.

Both QQQ & IWM are over their respective

Call Walls

at 400 & 190. This leads to an overbought condition in these indexes.

SPY’s Wall has rolled to 475, while SPX remains at 4,700. This leaves the S&P500 at a mildly overbought/fair value position.

The first thing to notice here is that our 1-day implied SPX move remains tight at 66bps, and this is due to the high level of gamma that is set to expire with tomorrows expiration. As we can see below, 4,700 is now the massive strike on the board, and a large level for today.

With yesterdays price action, a huge +60k of put (blue bars, below) interest was added to the 4,700 strike, along with 25k calls (orange). This new interest is spread out over a variety of expirations, leaving ~25% of total S&P500 gamma set to expire on Friday. As this gamma expires, our 1-day implied move should expand, and volatility should increase.

The rally in stocks has sharply increased the value of Index calls set to expire tomorrow, as shown below. You can also see how incredibly imbalanced this position is in terms of calls (orange) vs puts (blue). The expiration of these huge call position is what leads us to look for a pause and/or contraction in equity prices into early next week. These call positions are massive at 1.5-2x the size of Dec ’21 positions (depending on the Index/ETF).

If we look at the map we’ve been operating from, things are in line with expectations assuming this ~4,700 level sticks into Friday. The failure of the SPX

Call Wall

to roll higher helps to support our short term view of 4,700 resistance.

Further, as OPEX clears, we’ve been making the case that it paves the way for an expansion in volatility/market movement (i.e. our 1 day implied move shifting higher). Interestingly, the closing of this OPEX plays into the most bullish part of the year from a seasonality perspective, with stocks often finishing the year sharply higher (see below). The red box below highlights the potential for upside volatility in equtiies.

While we think the market will stall out and contract over the next few sessions, we’d ultimately argue that the clearing of OPEX positions should reduce any resistance to these year end flows.

In yesterday’s note we highlighted how tight the 0DTE SPX straddle was, at 55bps. Being short that straddle must have been quite painful, as the SPX moved up ~1.5% on the day. We think this low level of implied volatility into the event is what helped to create such a large reaction to FOMC, as traders who were betting on “next-to-no” volatility had to quickly cover, which expanded the market move.

This mispricing of 0DTE volatility yesterday did not seem to materially change the pricing of volatility into the near future. We see end of year >=4,700 calls in the SPX trading at <=9.5% IV, with downside SPX only slightly higher at ~11% IV. While, yes, there is a holiday period coming up, we think OPEX invoked volatility, along with seasonality, makes it rather compelling to be long options into end-of-year.

On this point, we cannot help but be fascinated by the 2021 analogy (see here). Shown below is December ’21, wherein the SPX rallied 1.6% on 12/15 FOMC day to close at 4,709! This then led to a contraction of equity prices into OPEX of -3%, before a sharp rally closed the SPX at 4800 into year end. While we’re not sure if things play out exactly like this today, we do think that prices will mimic this down-then-up path, with the core belief that volatility will now expand as it did in ’21.

In other words: be bullish or bearish but be weary of being short volatility.