Macro Theme:

Short Term SPX Resistance: 5,050

Short Term SPX Support: 5,000

SPX Risk Pivot Level: 4,900

Major SPX Range High/Resistance: 5,100

Major SPX Range Low/Support: 4,800

‣ Volatility should continue to contract into 2/14 VIX expiration – 2/16 equity expiration. Major downside “risk-off” occurs on a break of 4,900, which is our first major support. 5,000 – 5,015 (SPY 500) is major resistance.*

‣ Heavy call skews are a short term risk to equities after 2/16 OPEX & 2/21 NVDA earnings, as the unwind of call IV’s may invoke dealer selling.*

*updated 2/16

Founder’s Note:

ES futures are +15bps to 5,055. NQ futures are +50bps to 18,000.

Key SG levels for the SPX are:

• Support: 5,015, 5,000, 4,970
• Resistance: 5,050

  Call Wall

• 1 Day Implied Range: 0.55%

For QQQ:

• Support: 434, 430
• Resistance: 440

  Call Wall

IWM:

• Support: 200, 199
• Resistance: 210

  Call Wall

This morning traders are watching a PPI print at 8:30AM ET.

TLDR: 5,000 is major support for today, with 5,050 resistance. We’re in the neutral zone of the map posted earlier this week, and a neutral zone that may hold into Wednesday’s NVDA ER’s. We continue to think that, between OPEX & NVDA ER’s, the call chasing could cool off which leads to a market correction. The transition between “correction” and “crash” lies at 4,900. If we do get a test of 4,900, monitoring fixed strike vol for signs of higher IV is critical (higher IV suggests lower SPX). Accordingly, a rally today may well just be “noise” related do 0DTE chasing and OPEX dynamics. We have to cross some time/price boundaries before we are believers in extended upside.

The talk of the options world is the crowded bull trade, expressed via heavy long call demand which is blowing out call skews. Further, it seems that banks are coming around to the idea that NVDA is a major event coming up on 2/21, as shown below from Goldman (h/t ZH):

Call skews remain heavy vs where we were a week ago (see the skew table from 2/8, here), and are dominated by the speculative semi/crypto sector. We’re also seeing an ultra-fast “skew response” to anything that breaks (CSCO) or that catches media favor (i.e. energy stocks like XOM, OXY thanks to Buffet). This implies traders jumping into calls to buy dips.

The trouble with these skews is that it signals dealers have a short call position on (i.e. negative gamma). Therefore, dealers have to arguably hedge by buying stocks into higher prices, and selling stocks as the underlying move lower. This exacerbates volatility. Further, if the equities just stall, those rich call IV’s are likely to start coming in, which in theory reduces the long stock hedge required, leading to some dealer hedge selling.

To illustrate this, consider a current 2-week NVDA call option that is ~10% out of the money. The delta of that option is roughly ~35 with its current IV of 80%. If vols drop to 45%, the delta of that option declines to ~20. In this case, we can make a pretty strong bet that NVDA IV’s will drop after earnings, and this example illustrates why we’ve been suggesting that NVDA has an uphill battle into earnings. It’s important to note that IV’s are unlikely to budge before NVDA earnings on 2/21, too.

However, because there are high call skews across the board, its not just potential selling pressure for NVDA, but anything with a rich call skew could feel a bit more selling pressure. As NVDA is such a large component of QQQ, SMH, SOXL, etc, it may zap IV’s across the board.