Informe Option Levels

Futures are modestly higher to 3871. Key SG levels remain largely unchanged, with 3835 being the key pivot strikes. Critical support remains at the 3800 Put Wall strike. Resistance above is at 3875 (SPY 380), then 3900.

This morning is VIX expiration, however we do not anticipate any market impact. However, be advised there could see some odd futures market shifts (both ES & VX) before the 9AM ET settlement.

Short dated implied volatility has contracted sharply, as shown by the plot below. These are the SPX prices ranges implied by options prices, at various expiration dates. As you can see for nearly all near term expirations, odds strongly favor the S&P holding within the ~3775-3875 range. We see no reason to argue against these odds until 12/30 exp.

Key here is that struck at the peak of this distribution is the JPM collar 3835 call, which should continue to stifle volatility (see y’days note). Playing mean version back into this large strike may continue to have edge.

On Monday we marked 3800 as our huge support line, and yesterday we reiterated an edge to holding 3800. In yesterdays AM note we covered the sharp downside risks should the SPX press down into the 3750 area. Those risks still exist, even if they have low odds.

On the opposite side, the potential for a very strange “VIX up, Market up” scenario also lurks. We do not think this is a “2022” thing, but its food for thought. It seems that in this environment many large funds are concerned about missing a significant rally – and they way they may chose to hedge this is through call purchases. There needs to be an upside catalyst here, but if one were to arrive we could see a chase for long calls. This could generate a move higher in the VIX, and rapid shift higher in markets. Nomura talked about this recently, too.

Again, we are not looking for this type of action here and now, but keep in in your mind for 2023. Check out our discussion on this last night for more.