Futures are now back to last nights close near 3850, after overnight lows of 3803. The move was triggered by unexpected BOJ rate changes. While we have no view on BOJ impacts, we do think that surprise moves like these can be catalysts for volatility (i.e. movement in either direction).
Key SG levels remain unchanged, with major support at 3800, and 3835. Resistance above lies at 3855, then 3900. Volatility and skew continue to show no sign of fear despite the selling pressure in markets.
As we touched on last night, yesterday had all the hallmarks of equity fund liquidations like those we’ve identified in recent weeks. The interesting part, from our options perspective, was the continued lack of reaction in implied volatility.
As an example, shown here is the IV for Jan 3800 puts (h/t danny_kirsch). Implied vol for this contract finished lower on the day. As a reminder, the S&P was down ~1% on the day, and ~4% since the 13th (first date on chart below). Obviously one would expect IV to increase with large equity drawdowns.
Yesterdays lower markets did bring some additional put positioning at lower SPX & SPY strikes, the most significant being 360 SPY puts (+180k). With this we now see the SPY Put Wallshift down to 375. Put Walls rolling lower are bearish indications from our data.
Here is the major concern for equities, and one we wonder if the BOJ decision made more “real”. While through an options lens we’ve seen signs that equities should be supported (low IV, JPMCall Strike), we are increasingly worried about a break of 3800. To be clear, we expect 3800 to hold, but the dynamics below are ugly.
If some non-options catalyst sparks stock selling/higher volatility (like equity redemptions, or unexpected rate changes), then we think options derived support is lost at 3800. Further, due to the decay of the 3835 JPM Call, the support is a “shrinking” target as suggested by the dotted line, below.
As of now the JPM collar 3835 call is likely a large source of mean reversion flow: selling futures on moves >SPX 3835, and buying futures on moves <SPX 3835. However, as that call decays with time, it’s “gamma hedging band” shrinks (per yesterdays AM note). As time passes the support/resistance weakens, particularly under 3775/over 3875.
The concern then becomes on a move toward 3750 wherein hedging positions flip to a negative gamma position that fuels market volatility, vs a force to suppress volatility, as it likely is now.
Therefore while we favor market mean reversion at 3800 support, we think you lose hope of mean reversion as the S&P moves toward 3750. Further, if anything comes along that triggers long put (or long volatility) demand it could get really nasty – particularly if it combines with another catalyst (like year-end equity liquidations).
At 3800 it’s like you are bouncing on a trampoline – and at 3750 someone pulls the trampoline out from under you mid-bounce.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SG Implied 1-Day Move::||1.3%,||(±pts): 50.0||VIX 1 Day Impl. Move:1.4%|
|SG Implied 5-Day Move:||2.53%||3851 (Monday Ref Price)||Range: 3754.0 | 3948.0|
|SpotGamma Gamma Index™:||-1.34||-1.11||-0.44||0.01||-0.11|
|SpotGamma Absolute Gamma Strike:||4000||4000||380||11275||270|
|Call Wall :||3835||3835||410||11275||273|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||3936||3970||394.0||10675.0||309|
|CP Gam Tilt:||0.62||0.67||0.49||1.24||0.56|
|Delta Neutral Px:||3931|
|25D Risk Reversal||-0.04||-0.05||-0.02||-0.03||-0.03|
|Call Open Interest||5,070,987||4,904,865||6,848,814||51,546||4,527,066|
|Put Open Interest||9,548,316||9,437,262||11,677,197||47,404||6,065,438|
|Key Support & Resistance Strikes:|
|SPX: [4000, 3900, 3850, 3800]|
|SPY: [385, 382, 380, 375]|
|QQQ: [280, 270, 265, 260]|
|NDX:[12000, 11500, 11275, 11000]|
|SPX Combo (strike, %ile): [(3848.0, 86.07), (3837.0, 93.12), (3825.0, 86.1), (3818.0, 88.07), (3799.0, 98.51), (3776.0, 89.94), (3768.0, 88.51), (3749.0, 95.93), (3726.0, 78.56), (3719.0, 85.46), (3699.0, 96.17), (3677.0, 78.86), (3665.0, 80.57), (3650.0, 89.29)]|
|SPY Combo: [378.12, 368.24, 373.18, 381.92, 375.84]|
|NDX Combo: [11098.0, 10888.0, 10688.0, 11276.0, 11298.0]|