Informe Option Levels

Futures were unchanged overnight, holding 4075. Resistance remains at a band above from 4100 – 4110 (SPX Call Wall+SPY410 Call Wall). Above there resistance shows at 4126, however we mark any SPX move >4110 as overbought. Support shows at 4050-4055 (SPY405), then 4000. We continue to assign edge to grinding markets, with positive drift (see yesterdays note).

Eyes are on the 8:30AM ET Non Farms which is the last major data point for 7 trading sessions (then we see 12/13 CPI, 12/14 FOMC, 12/16 OPEX). We give edge to todays print being “in line” which means that short term volatility is sold and markets move up into the 4100 Call Wall area.

As we discussed during yesterdays Q&A, when given lower relative markets the default response of traders has been to sell implied volatility. There have been a few moments where markets have been caught offside by errant data (ex: hot CPI’s), or hawkish Fed statements – but by and large put selling has been a key recent theme.

Therefore once we pass this AM’s Non Farms we enter this 7-10 day widow with no obvious catalysts, which should be a green light for short term vol selling. This is why we are now looking for that upside grid/drift over the next week, with 4200 the current top possible end of our range.

Because we have this critical data on 12/13 & 12/14 there is really only short dated, 0DTE type options that can be sold. The market will not likely want to hold short volatility exposure for CPI + FOMC. This limits the “vanna thrust” available for the next week (for more of a visual on this, see this video).

This is reflected in options prices, as shown below. This chart shows the probability of the SPX closing at various prices by near term expirations (ex: “What are the odds of SPY closing at 380 on 12/13”). We extract this data from current options prices, and what you can see is that there is a major gap between “pre CPI” price expectations (blue boxes), and “post CPI” expectations (red boxes). For example, traders are assigning 5% odds of the SPY trading >430 on 12/16, but nearly 0% odds of >430 by 12/12.

On this note – our models by default assign a bullish edge to markets if/when the SPX is > the Vol Trigger. The top end of our trading range is the Call Wall, and if the SPX moves above the Call Wall, we consider it overbought. Based on our positional analysis, we think that 4200 likely becomes the Call Wall into that key 12/13 date.