Futures are higher to 3820 as elections begin in the US. Our Vol Trigger (3800) is sliding higher, indicating puts are being closed and/or calls added. We consider this a flat gamma region, with negative gamma below 3800 and material positive gamma building near 3900. This implies markedly higher volatility below 3800, and lower volatility if the SPX approaches 3900. For today, there is a band of resistance above at 3834, 3842 and 3850. Support is at 3800 then 3760 (SPY 375).
We see little reason to shift from yesterday’s view(s) that elections would release event-vol and be support of markets into Thursdays CPI reading. With that, we have noted how backwardated the SPX term structure is due to CPI, however the VIX is consistently drifting lower to its current level of 24.5.
Recall that the VIX measures the IV of all SPX options which expire <=30 days. Therefore we can compare this measure to the realized 1 month volatility[1MRV] of the SPX to identify a “state change” or “regime shift” in markets.
This is what the plot below shows, and you can see there are several times over the last 5 years wherein the VIX traded below the level of 1MRV. This happens rarely because one would generally assume that the future expectations of volatility (i.e. VIX) would be at least near the level of the volatility we have seen (i.e. realized vol), plus some premium due to the uncertainty of future events (i.e. hedging demand).
With that said, you will typically see the VIX<1MRV coming off of major equity lows wherein the VIX has had a massive spike with high RV, and then markets bottom and rip higher. For example in March of ’20, the VIX was ~80, and then the Fed came out to support markets and allay fears. This leads the VIX to tank as traders have a reason to think the worst is behind them, however that fear is still measured in the trailing 30 day RV window, and that generates a negative reading in the plot below.
The forward 30 day average SPX return when VIX<1MRV is +2.25% vs a forward 30day average for all data points of 1.2%. The 5 day and 30 day forward returns for negative VIX-1MRV readings are below – and while this is admittedly not a large sample set, there is a key insight here: the periods wherein this signal seemed to fail was when the market was at lows but had not yet received Fed support (ex: Nov/Dec ’18 and all of ’22). Intuitively this makes sense as traders are adjusting their view of future volatility absent a rally catalyst (which has historically been some form of QE or the “Fed Put”).
This leads us to today wherein the VIX is just below 1MRV as we head into a very important CPI reading on 11/10. While we have no view of what the CPI will be and/or how markets will react to it, it seems to us that even though short term IV is backwardated the IV at longer expirations is not pricing in much concern as indicated by the data above.
In a way one could read this as traders are not pricing in much volatility premium due to CPI, and if there is a bad CPI it could spark a rather nasty drawdown similar to that of September (i.e. +100 pt ES drop in 90 seconds).
If the CPI reading is good then markets likely take it as an implied Fed backstop and sharp rally – but ultimately we will not have true clarity until the 12/14 FOMC.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 3807 | 3804 | 379 | 10977 | 267 |
| SG Implied 1-Day Move:: | 1.0%, | (±pts): 38.0 | VIX 1 Day Impl. Move:1.54% | ||
| SG Implied 5-Day Move: | 3.15% | 3900 (Monday Ref Price) | Range: 3778.0 | 4023.0 | ||
| SpotGamma Gamma Index™: | -0.20 | -0.56 | -0.20 | 0.02 | -0.09 |
| Volatility Trigger™: | 3800 | 3780 | 380 | 11000 | 275 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 380 | 11050 | 270 |
| Gamma Notional(MM): | -233.0 | -160.0 | -1081.0 | 4.0 | -639.0 |
| Put Wall: | 3600 | 3600 | 365 | 10500 | 260 |
| Call Wall : | 3900 | 4100 | 385 | 11050 | 282 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 3853 | 3822 | 391.0 | 10476.0 | 292 |
| CP Gam Tilt: | 0.95 | 0.92 | 0.69 | 1.32 | 0.62 |
| Delta Neutral Px: | 3891 | ||||
| Net Delta(MM): | $1,724,750 | $1,690,860 | $184,031 | $42,699 | $96,086 |
| 25D Risk Reversal | -0.04 | -0.04 | -0.02 | -0.02 | -0.01 |
| Call Volume | 485,749 | 586,609 | 1,538,051 | 10,975 | 697,710 |
| Put Volume | 734,425 | 1,093,310 | 2,042,149 | 8,520 | 729,353 |
| Call Open Interest | 6,734,069 | 6,628,695 | 7,956,443 | 68,622 | 5,005,427 |
| Put Open Interest | 11,451,094 | 11,284,958 | 13,517,987 | 55,798 | 6,722,238 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4000, 3850, 3800, 3700] |
| SPY: [385, 380, 375, 370] |
| QQQ: [275, 270, 265, 260] |
| NDX:[12000, 11500, 11050, 11000] |
| SPX Combo (strike, %ile): [(3952.0, 84.09), (3899.0, 91.28), (3849.0, 84.73), (3842.0, 89.95), (3834.0, 84.85), (3826.0, 82.31), (3750.0, 79.11), (3727.0, 77.33), (3701.0, 93.7), (3674.0, 78.25), (3659.0, 81.73), (3651.0, 91.81), (3625.0, 75.92)] |
| SPY Combo: [369.31, 364.37, 389.07, 383.37, 382.61] |
| NDX Combo: [11054.0, 10670.0, 10867.0, 11076.0, 10461.0] |
