Informe option Levels

Futures are quiet, trading near 3970. A multi-day string of key data points begins today with GDP at 8:30AM ET, then Powell speaking at 1:30PM ET. Resistance shows at 4000, then 4048. Support shows from a band near 3960 (SPY395) to 3950, then 3890(SPY390 Put Wall).

We again reiterate our views laid out on Friday, that today likely sets up a rather strong directional move into 12/4 FOMC – 12/16 OPEX. With that, on a breakout higher we are looking for a target of 4200. A close above 4000 should be seen as bullish, as 4000 should invoke strong support.

Conversely our major support line has been the 3600 Put Wall. A close below 3900 is were we see gamma flipping materially negative. This likely coincides with a large spike in IV. Lower equity prices, and higher IV should invoke a reflexive feedback loop wherein dealers to sell future to hedge puts positions, which pressures the market lower, leading to selling more futures. Because FOMC is on 12/14 we do not see a great reason for traders to sell short term IV, which removes a key equity tailwind.

The takeaway here is that the range of possible prices is sharply skewed to the downside, as indicated in the chart below.

Below is a chart which portrays the probability of the S&P prices at various near term expirations. This data is derived from current SPX options prices. What you can see is that the market is pricing in a fairly low ~5% chance that the SPX trades <=3800 or up into 4200 by 12/16 OPEX (pink line). We are obviously of the view that there are higher chances of the market trading into these areas, given the barrage of catalysts and large DEC OPEX positions.