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: 4,800

Major SPX Range Low/Support: 4,600

‣ 4,800 is our current max upside target, due to a Call Wall shift on 12/19. Call Walls in QQQ/IWM are at 409/205.*

‣ A downside break of 4,700 is 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 mid to late January.*

*updated 1/4

Founder’s Note:

ES Futures are flat 4,750. Key SG levels for the SPX are:

• Support: 4,700, 4,686, 4667
• Resistance: 4,715, 4,750
• 1 Day Implied Range: 0.77%

For QQQ:

• Support: 400
• Resistance: 403, 409

  Call Wall

IWM:

• Support is at 198,
• Resistance at 200, and the 205

  Call Wall

There are some jobs data prints out at 8:30 AM, today.

The S&P has now ground down do our critical support level of 4,700. We also see the QQQ’s at 400, which is also a major support level. “Grind” is the critical word here, as the selling has remained under control.

Backing this idea is realized vol [RV], with 1-month RV at 10%, and 5-day RV at 5.7%. These figures are really rather benign, despite the SPX being down nearly 2% over the last 3 sessions.

In yesterday’s AM note, we laid out the idea that implied, or forward volatility has also been rather unresponsive in the face of this market downside. This can be seen in the chart below, which measures the VIX vs 1-month SPX RV (green line in the chart above). This metric is at its long term mean, suggesting that the VIX is fairly prices given the amount of movement we’ve had in the SPX. Said another way, there isn’t much fear.

As we have been laying out in the last few notes, should the major indexes move lower (SPX <4,700, QQQ<400), it should mark the onset of material negative gamma. This could serve to finally change our current, low volatility regime, to something more spicy. Below 4,700, our 1-day implied move (currently 77bps), would likely shift up toward 1%. Another example would be the premium in the VIX chart above – it would likely jump up toward the 90th percentile (blue dashed line) as traders start to hedge downside.

This higher volatility would start to invoke vanna as more of an immediate force in equity prices. Below is our vanna model, wherein we plot a standard path of SPX delta in gray. Along the Y axis is “dealer delta notional”, meant to display how much long stock exposure the dealer community has. A higher figure represents dealers having more long equity exposure, which in theory has to be hedged out via short ES futures (or other short delta instruments).

The purple line is an IV-adjusted delta, which measures the impact of increasing IV’s should the market go lower, and decreasing IV’s if the market goes higher. As you can see, at current market levels (red box) the two lines are almost equal. This informs us that simple changes in IV would not likely impact markets much. In other words, vanna is not a major factor at this time. However, should we start to shift lower in the SPX, the purple line starts to move rapidly higher. Intuitively this higher dealer stock exposure at lower SPX prices makes sense, because if dealers are short puts (due to traders buying them), then the combination of lower SPX prices and higher IV’s increases put prices rapidly. A short put is essentially long stock exposure, which is why the purple line goes higher. As the purple line goes higher, more futures must be initially shorted, and then maintained to hedge exposure.

This “purple line higher” i.e. downside vanna flows is what we’d expect to see if the SPX moves <4,700, which has a strong chance, today.

We wanted to take a quick sidebar here to talk about 0DTE flows.

Some would argue that in this new, 0DTE world, dealers are maintaining hedges via 0DTE options and that would decrease the impact of dealer hedging flows. While there is some statistical evidence of this (i.e. 0DTE is suppressing volatility), we’ve not found the “smoking gun” (much of this is because there is only 1 year of data over a period of drastically shifting rates).

That being said, its clear that 0DTE’s can be excellent at hedging today’s price exposure. What if you have exposures that are longer term? These concerns would particularly appear during periods of “unexpected uncertainty”. During these times, longer dated options exposures increase as traders focus on what may happen over the next days/weeks/months, and that in turn may shift how dealers need to hedge.

Consider the chart below, which shows the 10day moving average of 0DTE volume vs a 10day MA of the SPX. There were two major periods of volatility in ’23. The first was the March bank crisis wherein the SPX declined ~7%, and the second, we’d argue, was the Powell

pivot

at the end of October. This resulted in a 16% SPX rally, wherein traders likely needed to chase the rally by purchasing longer dated call options.

You can see that during these periods there is a retraction in 0DTE volumes. It is somewhat subtle (i.e. 5-10% reductions in the MA), but it does provide some evidence that during times of market volatility, hedging flows shift away from 0DTE. This infers that hedging with futures and/or longer dated options increases, which may result in more sustained periods of volatility.