Futures are off slightly to 4060. First resistance is at 4074, with major resistance holding at 4100 to 4110 (SPY410). First support shows in the 4060(SPY405) to 4050 band, with 4000 major support.
We still favor mean reversion, with declining volatility into 12/12. 4100 is the top of our trading range, due to the Call Wall being struck at that level. Our base assumption here remains that traders will elect to sell short dated vol, which is what may create positive drift for the week. Along these lines we see 4200 as our highest level into 12/12, however the Call Wallhas to roll higher in order to confirm this.
A break of 4000 would render this view invalid, as its likely that volatility shifts materially higher if that level is broken.
We wanted to zoom out this morning, and highlight an idea we have been working through. This is a very unique environment, and for some reason its lately been reminding us of 2017. Clearly this macro environment isn’t like that of 2017, which had the S&P +30%. 2017 also held the lowest 1 month realized volatility level in modern history of ~3.8 (vs 25 now).
The basic theme of that year was to sell IV at each and every opportunity, fueled by the idea that volatility wouldn’t substantially reverse. “Short VIX” products also made expressing this view easy, fueling leading to a buildup in short vol positioning that ultimately triggered Volmegeddon in Jan of ’18.
Yes, this year equities have been down substantially, and realized volatility up substantially. However, there has been a bit of a similar theme to that of 2017 – in selling volatility. While the size of 2017 short vol ETF positions was certainly larger, it feels a bit to us like there is a similar theme.
Shown below is the VIX (top) vs SPX (bottom), and YTD the VIX intraday high remains at ~39 on Jan 24th. Despite added geopolitical risks, record inflation and a rapid pace of rate hikes, the VIX has not gone higher. To this point, we’ve often highlighted skew measurements that suggest traders have been active put sellers into lower equities throughout the year.
You can actively see this short volatility behavior, too, in recent market action. Yes, there are large, sharp moves after data points like Fridays Non Farms, but one could make an argument that the velocity and magnitude of those moves are the result of the low liquidity environment, and not necessarily “fear”. In any case, those sharp drops are often met with put sellers, particularly in short dated options.
Anecdotally, we’ve also been seeing a wave of “sell calls for income” threads, which is also (of course) a short volatility position.
Through our lens, after this week you likely do not want to get caught short volatility – and remember, volatility works both ways. This is because of illiquid environment, charged by a myriad of major macro catalysts. Layered on top of this is record options volumes which imply that dealer hedging is more of a factor than ever before.
Below we’ve plotted the VIX, which now sits at 20 which is 5pts below 1 month volatility. In a way, this could be interpreted as traders anticipating less volatility going forward, as opposed to more (despite next weeks catalysts).
This idea has us wondering if traders are positioned in a relative short volatility akin to that of 2017. Is a tail move being underpriced, particularly one that feeds off of the short volpositioning? The downside tail risk potential seems obvious, and has existed all year. However, we think that the possibility of a “VIX up/Market up” move is also arguably as real here as it’s ever been.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4071 | 4061 | 406 | 11994 | 292 |
| SG Implied 1-Day Move:: | 1.03%, | (±pts): 42.0 | VIX 1 Day Impl. Move:1.2% | ||
| SG Implied 5-Day Move: | 2.82% | 4071 (Monday Ref Price) | Range: 3957.0 | 4186.0 | ||
| SpotGamma Gamma Index™: | 0.88 | 1.11 | 0.04 | 0.05 | 0.01 |
| Volatility Trigger™: | 3995 | 3995 | 402 | 11540 | 289 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 400 | 11650 | 290 |
| Gamma Notional(MM): | 306.0 | 196.0 | 174.0 | 7.0 | -6.0 |
| Put Wall: | 3800 | 3800 | 380 | 11000 | 280 |
| Call Wall : | 4100 | 4100 | 410 | 11650 | 300 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4025 | 4015 | 406.0 | 0 | 300 |
| CP Gam Tilt: | 1.25 | 1.1 | 1.05 | 1.52 | 1.0 |
| Delta Neutral Px: | 4007 | ||||
| Net Delta(MM): | $1,599,584 | $1,731,034 | $189,778 | $60,074 | $96,072 |
| 25D Risk Reversal | -0.05 | -0.04 | -0.05 | -0.04 | -0.05 |
| Call Volume | 511,067 | 567,555 | 2,095,173 | 5,291 | 863,555 |
| Put Volume | 812,982 | 896,932 | 3,113,351 | 5,689 | 908,446 |
| Call Open Interest | 5,955,742 | 6,254,624 | 7,903,493 | 69,525 | 5,101,400 |
| Put Open Interest | 11,709,169 | 11,837,335 | 13,676,519 | 67,301 | 6,947,890 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4100, 4050, 4000, 3950] |
| SPY: [420, 410, 405, 400] |
| QQQ: [300, 290, 285, 280] |
| NDX:[12500, 12000, 11650, 11500] |
| SPX Combo (strike, %ile): [(4251.0, 92.29), (4202.0, 98.37), (4173.0, 91.59), (4153.0, 82.24), (4149.0, 96.47), (4145.0, 74.11), (4124.0, 93.1), (4104.0, 86.37), (4100.0, 98.78), (4076.0, 91.54), (4051.0, 91.67), (3998.0, 79.02), (3974.0, 79.79), (3901.0, 85.8)] |
| SPY Combo: [409.76, 419.93, 414.64, 412.2, 424.81] |
| NDX Combo: [11646.0, 11479.0, 12294.0, 12090.0, 11970.0] |
