Futures are off slightly to 3900. Key levels, and IV dynamics, remain unchanged. Resistance remains at 388SPY/3880SPX, then larger resistance at 3900. Support shows at 3850, then 3835.
We anticipate 3900 resistance holding, as we believe the combination of traders incrementally selling calls, along with the pull of the 3835 JPMcall, will suppress upside movement today into tomorrow. As a reminder we have a full trading day tomorrow, and US markets are closed on Monday.
The chart making the AM rounds today is the record CBOE Equity Put/Call ratio, shown below. Many regard this as a signal that traders are bracing for worlds end, but we can say with upmost confidence that this is not fear-based demand (which likely does not come as a surprise to SpotGamma readers). This put activity is being driven by an “operational” trade, and we’ll have a full report detailing this phenomenon shortly.
As things are a bit quiet today, we wanted to shift to some “theoretical” in this mornings note. We are working through an interesting setup into January, and with that, we wanted to provide some unique thoughts around early ’23 positioning.
The most interesting chart today is our Risk Reversal, which measures 30 day, 25 delta put IV – 25 delta call IV. This metric is as high as we’ve marked since ’20. This is being driven by lack of demand for upside protection, and is not a particularly new phenomenon. However, this morning it sparked a thought related to yesterdays “VIX up, market up” comments.
We have a baseline assumption that our Risk Reversal, which is currently at -0.03, couldn’t go positive. A positive figure would imply that call IV is higher than relative put IV in SPX. While this is something you may see with some frequency in “call-heavy” stocks (like GME during meme-mania), it’s a rarity in the S&P. As evidence of this consider the relationship of the VIX to SPX – we all bank on that relationship being inversely correlated.
Many opine on the strange relationship this year between lackluster IV and downside equity action, and the general consensus is that put demand dried up as funds de-grossed. Simply said: no one wants downside hedges because they don’t have anything to hedge. That lack of demand leads to low implied put vol.
Following this line of reasoning, traders would have to rebuild equity positions, and/or we would need a credit event to spark put demand. This does not mean equities cannot go lower, it just suggests that the relative IV increase for a given equity decline likely remains constrained (i.e. VIX is sluggish on market weakness).
If funds are arguably light on their equity allocation, it could be equated with their risk being an upside move in equities. This is where incremental long call demand could come from – either traders preemptively hedging that right tail risk, and/or caught up in an equity chase. This scenario could force our Risk Reversal metric into a positive figure, and drive that “VIX up – market up” scenario.
That leads us to what should prove to be an interesting January expiration. Many of you may recall last January, wherein we highlightedmassive call position set to expire at OPEX. Following that, the S&P declined ~8%, making its low (and YTD intraday VIX high) the day after OPEX (Jan 24th).
For Jan ’23 OPEX, the overall equity options positions are very large, and fairly well balanced from a put delta vs call delta perspective (shown below). If you add in large ETF/Index positions, the net delta of the Jan expiration shifts much more to the put side(-$100bn net delta).
We’d also note the names with large Jan OPEX net put positions are the highest beta, core index components like: AAPL, AMZN, TSLA, GOOGL. On the call weighted side its laden with DOW component/healthcare/biotech: BRK, CI, MRNA, BA.
While this setup is not quite as clear/unbalanced to last years, Jan expiration is very large, and we think it will be a major catalyst to start the year. Additionally the JPM collar 3835 pin will be removed with 12/30 OPEX, which should provide some equity movement into the new year.
This could lead to an interesting setup which could spark a strong rally, characterized by heavy call demand. In a situation where in there is an OPEX driven put-cover in high beta names traders could be caught off guard, and left chasing the move via call purchases. In this situation you could have a strong “VIX up-market” up response as a result.
Note that this is currently a speculative/counter-trend concept, which we will fill in with more data next week. However, we do believe that 2023 could lead to many instances that lead to “VIX up – market Up” environments as traders focus more on hedging the right tail vs left.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 3878 | 3877 | 386 | 11235 | 273 |
| SG Implied 1-Day Move:: | 1.29%, | (±pts): 50.0 | VIX 1 Day Impl. Move:1.27% | ||
| SG Implied 5-Day Move: | 2.53% | 3851 (Monday Ref Price) | Range: 3754.0 | 3948.0 | ||
| SpotGamma Gamma Index™: | -0.55 | -1.17 | -0.24 | 0.02 | -0.08 |
| Volatility Trigger™: | 3900 | 3830 | 386 | 11250 | 276 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 390 | 11275 | 270 |
| Gamma Notional(MM): | -319.0 | -227.0 | -1182.0 | 3.0 | -564.0 |
| Put Wall: | 3800 | 3800 | 380 | 11000 | 270 |
| Call Wall : | 3835 | 3835 | 388 | 11275 | 278 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 3939 | 3909 | 391.0 | 10737.0 | 304 |
| CP Gam Tilt: | 0.84 | 0.87 | 0.71 | 1.37 | 0.69 |
| Delta Neutral Px: | 3904 | ||||
| Net Delta(MM): | $1,298,713 | $1,377,459 | $160,455 | $36,492 | $82,567 |
| 25D Risk Reversal | -0.03 | -0.03 | -0.01 | -0.03 | -0.02 |
| Call Volume | 554,067 | 454,495 | 2,262,665 | 5,518 | 748,554 |
| Put Volume | 835,514 | 730,815 | 2,871,057 | 4,982 | 1,499,482 |
| Call Open Interest | 5,335,494 | 5,250,768 | 7,142,161 | 53,584 | 4,765,044 |
| Put Open Interest | 9,569,539 | 9,604,675 | 12,054,045 | 46,941 | 6,069,115 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4000, 3950, 3900, 3850] |
| SPY: [390, 388, 385, 380] |
| QQQ: [280, 275, 270, 265] |
| NDX:[12000, 11500, 11275, 11000] |
| SPX Combo (strike, %ile): [(4053.0, 79.48), (4002.0, 84.04), (3928.0, 81.51), (3897.0, 80.02), (3878.0, 77.47), (3866.0, 75.8), (3851.0, 92.13), (3835.0, 84.85), (3828.0, 86.85), (3816.0, 92.33), (3800.0, 96.57), (3777.0, 84.97), (3766.0, 82.7), (3754.0, 93.32), (3704.0, 94.12)] |
| SPY Combo: [378.51, 368.85, 373.87, 380.05, 383.53] |
| NDX Combo: [11090.0, 10888.0, 11281.0, 10685.0, 11292.0] |
