Macro Theme:

Short Term SPX Resistance: 4,800

Short Term SPX Support: 4,750

SPX Risk Pivot Level: 4,700

Major SPX Range High/Resistance: 4,800

Major SPX Range Low/Support: 4,500

‣ 4,800 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 414/205.*

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

‣ SPX IV’s for the final week of 2023 are extremely low, and we warn traders of “jump risk” embedded with this.*

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

*updated 12/27

Founder’s Note:

ES Futures are flat at 4,832. Key SG levels for the SPX are:

• Support: 4,759, 4,750, 4,700
• Resistance: 4,785, 4800, 4,815
• 1 Day Implied Range: 0.75%

For QQQ support is at 410 & 409, with resistance at the 414

Call Wall.

In IWM, support is at 200, 196 & 190, with resistance the 205

Call Wall.

Today, the last trading day of 2023, features little on the data front, and traders anticipating little in the way of volatility. To wit, today’s at-the-money SPX straddle is $19.35 with an IV 13.8%. This informs us that the market is pricing in 40bps of movement today in the S&P500 index.

Each day of this week has had very low opening implied volatility expectations, and SPX moves have come in under those expectations. Consider the last 5 open-to-close moves: 0.48%, 0.01%, 0.33% , 0.17%, -0.06%.

As has been the theme of our last several AM notes, this low level of volatility is not something you likely want to short because of poor risk/reward, while clearly long volatility isn’t yet working, either.

While there is no major news today, there is, of course, the much-hyped JPM collar roll (if you are new to this, please see here).

The roll will involves the expiration of the current JPM colla position, which are ~40k contracts of a very deep ITM 4,515 strike call, along with ~40k now-worthless put spreads. At today’s close, this position will be rolled out to a new collar spread position for March 28th expiration, which results in the JPM fund selling 40k contracts of ~3-5% OTM calls, to fund 40k put spreads with a top strike that is -10% below current S&P500 levels.

In recent quarters, the bulk of this roll has been done very late in the day and into the 4:15PM ET close of options trading, and that is what we’d anticipate for today. The late day trading seems to have mitigated intraday market impact. However, the dealers could always decide to shift how they operate, and so any unusual market moves should involve a check of the trading tape for large March 28th expiration, or sizeable in-the-money 0DTE trades. If you see large prints (or large

HIRO

shifts) it’s a signal that corresponding market movement is related to the roll.

The deep ITM 0DTE call is often used as part of the brokers own internal hedge as it rolls into and out of the JPM collar position.

The result of this large JPM call expiring, along with a host of other deep in-the-money calls expiring, is that there is a sizable dollar value of calls rolling off on the close. You can see this in the chart below, with call values (orange) dominating puts (blue). In delta notional terms, this expiration, while large, is about 1/3 the size of the record December 15th expiration.

Again, we haven’t seen a direct intraday market impact from this roll over in the past several quarters. However, if there were a chance for it to make an impact, today would be the day it appears. We say this due to the fact that there are these material call values expiring into holiday liquidity, with anemic volatility pricing in the S&P500. While we love volatility, its rather unlikely we see any real impact from this trade. This is because there are a variety of mechanisms that the broker can use to offset imbalances on the close.

There is an outside chance wherein the JPM roll could place a bit of pressure into the 0DTE-ladened SPX (which is pricing in very little movement). That pressure in turn could cause a scramble for 0DTE covering and a corresponding jump in volatility/market movement (akin to last Wednesday). In theory the dealers here have a large short delta hedge on vs long the Dec SPX calls expiring (the JPM fund is short calls), and so its possible the volatility could manifest as a move higher in markets. This isn’t something that you likely want to bet on – more of a speculative thought experiment…

Another somewhat related part of this roll pertains to the shift in the SPX

Call Wall

to the 5,000 strike. The overall gamma at 4,800 is very large (as seen below), and there are little in the way of call positions (orange) above this level. Therefore the

Call Wall

shift today was due to the build up of some puts at 4,800, as seen below in blue, with the next largest net call position being up at the 5,000 strike.

Today’s JPM collar roll should place another ~40k calls up just under that 5,000 strike. This area then becomes a rather large upside magnet in the event of a January breakout. We want to see a close above all the gamma at 4,800 to really open up this possibility. This is because we believe that largest 4,800 strike gamma functions as support, and a base for constructive upside.

Conversely we are still working from a move <4,700 as our “risk-off” signal, however that signal is likely to shift higher after today’s expiration.

One indication of the risk-off signal being at a higher strike is that our Vol Trigger has worked up to 4,785, which suggests that the balance between puts & calls is shifting up. Should we flip from the current position which is predominantly calls (i.e. a positive gamma position), to puts (a negative gamma position), it may signal a pick up in volatility, which often ties to jump lower in stock prices.