Quick Reference

‣ SPY: -0.55%

‣ QQQ: -0.75%

‣ IWM: -1.38%

 

‣ SPX close: 4975.51 | Prior: 5005.57 [-30.06]

‣ SPX VT: 4995 | Prior: 4945 [+50]

‣ ES VT: 5010 | Prior: 4960 [+50]

‣ VIX index: 15.42 (+0.71 = +4.83%)

‣ VVIX index: 86.10 (+3.47 = +4.20%)

 

 

 SG Gamma Index™

‣ Tuesday’s (Feb 20): 0.464 [-2.315] (neutral market gamma)

 

‣ Friday’s (Feb 16): 2.779 [+1.522]

‣ Thursday’s (Feb 15): 1.257 [+0.987]

‣ Wednesday’s (Feb 14): 0.270 [-1.958]

‣ Tuesday’s (Feb 13): 2.228 [+0.217]

‣ Monday’s (Feb 12): 2.011 [+0.163]

‣ Friday’s (Feb 09): 1.848 [-0.415]

‣ Thursday’s (Feb 08): 2.263 [+0.619]

‣ Wednesday’s (Feb 07): 1.644 [+0.154]

‣ Tuesday’s (Feb 06): 1.490 [+0.169]

Sectors

Worst sectors: Innovation (ARKK -3.26%) | metals (XME -2.01%)

 

Best sectors: consumer staples (XLP +1.05%) | gold miners (GDX +0.48%)

Earnings

‣ Tuesday, Feb 20 (PM): TDOC

‣ Wednesday, Feb 21 (PM): NVDA, RIVN, ETSY, LCID

 

‣ Thursday, Feb 22 (AM): MRNA, NKLA

‣ Thursday, Feb 22 (PM): SQ, CVNA

Upcoming Market Events

Wednesday, Feb 21 (2pm EST): FOMC minutes

Wednesday, Feb 28: GDP

What’s Happening in the Market

Equities saw selling today after a widening of levels/range and a weakening of market gamma by over two full points: SPY -0.55%, QQQ -0.75%, and IWM -1.38%.

In general, what happens with a monthly opex is that a large block of market gamma is expected to be removed, especially when there is modeled to be more

call gamma

expiring, which there was. With the SG Gamma Index™ opening neutral at 0.464 this morning, which was a significant drop [-2.315], the big picture implications for us as traders/investors is that the structural margin for error becomes smaller in these scenarios, from which the price can break more easily into risk-off territory.

 

Prior to the monthly opex (when market gamma was much more positive), the distance above the

Volatility Trigger

™ was significantly higher. But now with the VT opening at 4995 SPX (5010 ES), this means that equities had only a tiny margin of error (for prices to drop at all) before market conditions would be considered dangerous.

 

The result (of a bearish open) is equities in the same kind of trouble as if a Triple Witching event had removed a full -3.0 of market gamma.

<Chart of ES futures – via our NinjaTrader integration>

Normally,

Zero Gamma

is above the VT, but that fact aside, on the intraday level the price fell beneath the VT and then began interacting with the next level below. Even with a generous threshold, this would be considered a breach from a statistical view.

 

Focusing instead purely on the models, what happened structurally here is that the

Put Wall

moved back down significantly, and the

Call Wall

moved up (to 5100). Indirectly, this suggests a widening of the most probable range.

 

 

SPX Gamma Model

$4,030$4,530$5,030$6,007Strike-$1.6B-$911M-$211M$1.1BGamma NotionalPut Wall: 4500Call Wall: 5100Abs Gamma: 5000Vol Trigger: 4995Last Price: 5005

View All Indices Charts

 

Overall, what happened structurally here is that the

Put Wall

moved back down significantly, and the

Call Wall

moved up (to 5100). Indirectly, this suggests a widening of the most probable range.

 

What is more difficult to interpret is that the

Volatility Trigger

™ moved up today (by 50 points) which establishes a mixed signal overall. Focusing on the most practical implications of this, it did compress the margin for error of market safety, which remained broken since the early premarket. Compounded with [intraday]

VWAP

distribution, this broadly maintained a bearish tone for equities, and one that will continue now that SPX closed underneath its VT.

 

One model which shows just how close we are and how SPX can easily scrap back up is the Combo view, which aligns itself with associating levels of SPY gamma. From this perspective, SPX very narrowly closed at the bottom of the range where positive gamma strikes had established themselves. This extends the structural theme today of more immanent probable risk to the downside.

We have had many questions about Flow Alerts lately, and so to illustrate a common pattern (clustering), we see a group of them when there is chop.

This means that a primary aspect of Flow Alerts is to detect when the price is fighting around its point of notional balance, whether breaking above or below it. This is also why you will not see a new alert if there is already a dominant [bear or bull] balance in motion.

For a more specific interpretation of those net bearish flows from about 11am to 2pm EST, we can see that put flows were steadily bearish all day, although slowing down by about 2pm EST. And then call flows peaked into a topping formation at 11am, for a reasonable not-bullish trade.

MAG7 had a much different behavior today (MAGS -1.57%), with puts and calls tumbling down in unison until about noon EST. That form of coordination is a strong pattern for continuations. However, this pattern morphed once call flows began rounding out at the bottom. Coming out of 2pm, call flows were now decisively bullish, which was net bullish when confronted with continually-flat put flows.

We had a member request to evaluate NVDA (-4.35%) here tonight, and for that we can fit that MAG7 pattern and see where it deviates from there. Overall, it had the same pattern, but it was cleaner on NVDA with more linear [bear-flat-bull] segments.

As a final stock example today and one of something exceptionally tactical, TSLA (-3.10%) had a distinct bearish call reversal signal, and then dipped after that.

What stands out with TSLA here is how puts and calls were agreeing with each other at nearly every segment. This adds extra credibility to the current underlying trend direction, and suggests waiting before expecting mean reversion.

Concluding with a review of what happened with volatility, a comparison here of a 30DTE volatility smile (teal) and an 87 DTE smile (yellow) shows that the options market is not taking the upside very seriously at longer durations.

For anyone shopping for methods to express an upside view with limited risk, then stalking a bid on that longer-duration

call gamma

could be a durable way to have some upside exposure, especially if capped with a wingtip (making it a vertical) to help slow price decay from time drag and IV crush.

 

And by taking a horizontal look at implied volatility, any strikes before about 60DTE are cleanly above the 90^th percentile.

Unlike a grandfather clock, the volatility pendulum can keep swinging in one direction to the point of going vertical and surprising everyone, but beyond this point of 90^th percentile it usually pays off to find a well-placed mean-reversion trade with defined risk. One example of many to express that thesis would be to use a covered short put.