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

Major SPX Range Low/Support: 4,400

‣ We look for higher volatility starting 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 400/200.*

‣ After a period of consolidation around 12/15 OPEX, we look for a final year end rally, with a downside break of 4,700 our interim “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 12/14

 

Founder’s Note:

ES Futures are higher at 4,785. Key SG levels for the SPX are:

• Support: 4,700, 4,650
• Resistance: 4,750, 4,776, 4,800
• 1 Day Implied Range: 0.76%

QQQ resistance is at 405, with support at 400.

IWM resistance is at 200, with support at 189.

TLDR: We continue to favor a pause/consolidation in equities into early next week, and then a final year end move higher. Options values/IV’s in the SPX are very low, allowing traders to enter both upside and downside exposure (i.e. long volatility positions) at low relative costs.

Today we see ~30% of S&P500/Nasdaq/Russel gamma expiring, with the bulk of that centered in the 4,700-4,750 area for S&P (470-475 SPY), near the 400-405 strikes for QQQ, and 200 strike for IWM. The removal of this gamma with expiration should allow for index volatility to increase – a factor which has already started to come into play. Consider our SPX 1-day implied move which is now at 0.76% which is our highest estimate since 11/27.

This volatility estimate is derived from gamma positioning, and as the SPX has slid to the higher end of the range framed below, at-the-money gamma is declining (i.e. the orange bars are smaller). This reduces the restrictive hedging flows.

 

In terms of how big this expiration is – its a beast. Our preferred way to measure the expiration size is through delta, which translates the option value to its underlying stock equivalent (this vs other measurements circulating in the “trillions” which measure an option contract = 100 shares of stock notional).

As you can see below, December expiration is huge with ~1.3trillion of

call delta

notional set to expire. Puts are essentially nonexistent.

We continue to believe that this call-heavy expiration will lead to some consolidation in stocks, but we appear to be fighting a heavy, bullish tide on this front.

On the thread of heavy call activity, yesterday was the largest

call volume

day ever, besting 2/2/23. Interestingly the S&P declined 1.5% after that day. Despite this record

call volume

, the SPX only added 26bps.

While volumes are hitting records, actual open interest has a ways to go, particularly with today’s expiration removing a large chunk of positions. Here we can see calls (gray) are still off of highs of Q4 ’21 & Q4 ’22. Therefore while volumes are massive, there still seems to be room for traders to add calls. When actual call open interst is added, it can accelerate upside (i.e. gamma squeeze), as dealers must buy stock into higher stock prices.

Our takeaway here is that we continue to look for sticky stock prices and/or consolidation into early next week. We also think S&P500 volatility will start to increase.

Shown below is SPX term structure, and as you can see current readings are at the lowest they’ve been in +60 days (shaded cone). These ~8.5% IV readings are pricing in just 54bps of daily movement in the S&P500, and should the market start to move more than (either up or down), it could create a bid for long options positions. This bid for long options (i.e. volatility) can accelerate stock movement.

A blow-of-top seems to be consensus now, but options positions seem poised to support a sharp move. Seasonality, rates, and sentiment seem to support higher stocks into year end – and a “stock up, vol up” scenario would accelerate movement. Further, single stock call skews are not all that heavy when we look broadly across names (i.e. calls are not bid to the extremes).

Fortunately because option IV’s are so low its fairly cheap to express any view that fits your portfolio.