Futures are higher to 3680 as we close out Q3 of ’22. Key levels are little changed. Resistance appears at 3700, followed by 3720 (SPY 370). Support shows at 3653 and 3602. We anticipate high intraday volatility today, much like the last several sessions.
Today, we believe, is a turning point for equities. In the “Macro Theme” section above we’ve noted two core themes over the recent weeks:
- We look for a sustained directional move from FOMC into the end of September.
- We think that markets may bounce out of today’s quarter-end OPEX.
We bring up these points because despite a very rough macro landscape, the equity market appears to have respected the options dynamics of time (expiration) and price (large put strikes). Despite all the market anxiety this week, our Put Wall (the strike we see with the largest put position), hasn’t changed since 9/23/22. If nothing else – as a sentiment indicator – this indicates that options traders didn’t buy significant puts at lower strikes despite the debt crisis.
A quick interlude on today’s JPM roll, which we think probably garners too much attention now. There will be several large SPX block trades today as dealers facilitate this collar roll. Ultimately today’s JPM collar will expire, and a new collar will be established for Dec 30 OPEX. The market impact of this today could come from intraday hedging of this position, which has a maximum level of ~$10billion. This has the potential to impact volatility today, but its very tough to estimate where and when. Odds are there will be some large MOC prints, and some potential jumpiness into the close.
After today, because this position is rolled out in time and out in price, its impact is diminished.
What is interesting about today’s expiration is that its really not that large, but it is meaningful because its purely put positions. Shown below is the delta notional tied to each OPEX, and you can see that we calculate roughly $120bn in put delta (teal bars) expiring across SPY/SPX/QQQ/NDX. This is 1/2 the size of the Sep Monthly OPEX, and 1/4 the size of Dec OPEX (mark that Dec expiration!).
This put expiration is enough to give equities a bump, and that could lead to a rapid decline in implied volatility. So, we have puts deltas coming off due to expiration, but also vanna. Shown below is the VIX which has hit recent highs – but note too the movement of the TDEX “Tail Risk” index. There was a sharp move in this metric over the last week which tells us that traders were buying deep out of the money puts. On a rally this stuff could get smoked, and could help generate a ~5% equity rally rather quickly.
We need to be very clear about this. The macro risks in this environment are massive, an its the perfect environment for something to snap and lead to limit down style moves. This is why we favor playing rallies in call positions with fixed risk. Second, this view of a rally is based on positional analysis, nothing fundamental.
Because we are in a put-heavy environment with high volatility rallies should be treated as very unstable and subject to rapid reversal. Think CPI crash, or even yesterdays reversal from 3940 Wed closing to 3910 Thursday lows. Those were 3-5% rallies which retraced in hours.
There is path dependency here, too. While we look for a rally into next week, we believe that the clearing out of put positions ultimately allows for lower market prices father out in time. While today’s 3600 Put Wall strongly appears to be the floor into today’s expiration, that floor is likely to be pushed lower after OPEX (i.e. Put Wall lower). Take, for example, today’s JPM collar position, which may be rolled down 3-5% from 3580 to somewhere around 3400.
Notice: Listen here to our conversation with Scott Nations, Founder, Nations Index which includes SDEX, TDEX, VOLI & VOLQ. Topics include volatility, skew and tail risk.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SG Implied 1-Day Move::||1.2%,||(±pts): 44.0||VIX 1 Day Impl. Move:2.01%|
|SG Implied 5-Day Move:||2.7%||3695 (Monday Ref Price)||Range: 3595.0 | 3795.0|
|SpotGamma Gamma Index™:||-1.96||-1.44||-0.41||-0.01||-0.12|
|SpotGamma Absolute Gamma Strike:||4000||4000||360||11750||275|
|Call Wall :||4400||4300||371||11750||281|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||3890||3944||390.0||11407.0||308|
|CP Gam Tilt:||0.46||0.41||0.47||0.86||0.51|
|Delta Neutral Px:||3953|
|25D Risk Reversal||-0.07||-0.07||-0.06||-0.07||-0.07|
|Call Open Interest||6,060,790||5,889,707||8,612,109||56,482||4,948,657|
|Put Open Interest||10,712,106||10,762,722||12,910,524||73,333||6,844,472|
|Key Support & Resistance Strikes:|
|SPX: [4000, 3700, 3650, 3600]|
|SPY: [370, 365, 360, 350]|
|QQQ: [290, 280, 275, 270]|
|NDX:[12000, 11750, 9200, 9175]|
|SPX Combo (strike, %ile): [(3700.0, 92.62), (3664.0, 73.79), (3653.0, 93.94), (3627.0, 77.72), (3620.0, 76.85), (3613.0, 86.95), (3602.0, 98.48), (3580.0, 95.4), (3576.0, 84.79), (3562.0, 84.58), (3551.0, 91.19)]|
|SPY Combo: [358.8, 356.62, 363.88, 368.59, 353.72]|
|NDX Combo: [11087.0, 10886.0, 11299.0]|