Futures have slid lower to 3619, indicating the S&P will open at or near the 3600 Put Wall support. Support below there is 3580 and 3550 (SPY Put Wall 350 equivalent). Resistance above is 3627 and 3652.
The Put Walls are the bottom of our trading ranges. They did not roll lower overnight. A break of these levels indicated “oversold” conditions in the market. Should Put Walls roll to higher strikes tomorrow, we view that as a bullish indicator. A roll to lower strikes is bearish. Our market view will likely shift accordingly.
Its our view that the best risk/reward in the options market here is looking at call positions to play upside into October. More on this below.
Out of FOMC, we called for a large directional move due to OPEX dynamics. The chart below is what we posted in our morning 9/21 “FOMC Day” note. We suggested that, should FOMC trigger downside, 3600 was the target into 9/30 expiration. This view was based upon the reflexive feedback loop of options hedging, wherein lower SPX prices draw more downside hedging pressure.
Assets, on a global scale, have deteriorated over the last several days. Generally you will hear us quip “headlines have more impact in negative gamma environments”, because we see large negative gamma equity positions as driving excess volatility. Would markets be weaker off of the magnitude of once in a lifetime moves in rates, currencies? Compounded by AAPL production cuts? Quite likely. Do the options flows add to this volatility? We’d bet on it.
That brings us to this rather unique moment. As we outlined yesterday AM, we have signals that the options market pendulum has swung to maximum put positions. This has been associated with market bottoms (again, covered in y’days note). Some of these large put positions will clear out on 9/30, providing some “relief” to that max put position. This is why we maintain our view that markets could bounce into next week. It’s strictly an options based view.
We also feel that to buy put options here means you are likely looking for some type of catastrophic positioning event like a “Soros”, “LTCM, or credit defaults. I am not here to suggest you should not buy puts if you’d like/need to – its just that one needs major volatility to generate a return from current IV levels (i.e. VIX at 35).
Let’s end with some objective data. The plot below is the daily gamma index vs forward 1 day volatility (in the form of intraday high/low). “Given yesterdays gamma reading, what is volatility today?” Note how volatility seems to decrease if gamma readings worsen (i.e. moves left on x axis). With the big JPM collar put position at 3580 one has to assume that negative gamma would increase should the market shift to 3580-3600, invoking our next data point to the left of todays red line (ex: -3.0 on the index).
In our view this lower volatility is evidence that markets find support at these put-extremes.
Why do we think volatility contracts with larger put gamma (more negative gamma readings)? We believe it is because dealers are on net long puts, but most of those positions are (or were) deep OTM. When we get extreme volatility those out of the money put positions begin to pay off for them, allowing them to increase market liquidity.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SG Implied 1-Day Move::||1.18%,||(±pts): 43.0||VIX 1 Day Impl. Move:2.06%|
|SG Implied 5-Day Move:||2.7%||3695 (Monday Ref Price)||Range: 3595.0 | 3795.0|
|SpotGamma Gamma Index™:||-1.99||-1.94||-0.42||-0.01||-0.13|
|SpotGamma Absolute Gamma Strike:||4000||4000||370||11750||280|
|Call Wall :||4200||4300||371||11750||325|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||3986||3983||397.0||11430.0||318|
|CP Gam Tilt:||0.42||0.4||0.42||0.89||0.49|
|Delta Neutral Px:||4020|
|25D Risk Reversal||-0.08||-0.08||-0.06||-0.08||-0.08|
|Call Open Interest||5,715,812||5,570,560||8,004,274||55,078||4,714,685|
|Put Open Interest||10,637,268||10,386,196||12,510,849||72,932||6,994,416|
|Key Support & Resistance Strikes:|
|SPX: [4000, 3800, 3700, 3600]|
|SPY: [370, 365, 360, 350]|
|QQQ: [290, 285, 280, 275]|
|NDX:[12000, 11750, 9200, 9175]|
|SPX Combo (strike, %ile): [(3751.0, 89.82), (3700.0, 93.22), (3667.0, 72.95), (3652.0, 93.79), (3627.0, 85.16), (3623.0, 73.52), (3616.0, 84.62), (3601.0, 98.3), (3583.0, 92.48), (3576.0, 84.66), (3565.0, 78.95), (3550.0, 91.57)]|
|SPY Combo: [358.66, 363.74, 368.47, 356.84, 353.57]|
|NDX Combo: [11091.0, 11497.0, 11294.0, 11001.0]|