Informe SG Levels

Futures are trading near 4000 after a fairly quiet overnight session. SG’s volatility estimates comes in again at 1.22% (open/close) with the VIX pricing in a 1.8% SPX move. Our key “pivot” line is 4000 with resistance at 4100. Support shows near 3950, then 3921. Also note 300 in QQQ is a key pivot line.

Friday contains a large options expiration, and therefore we think the options market can exert some driving shifts in markets as the week pushes ahead. There is some path dependency to this force, and if the S&P500 holds >4000 then that force should be a fairly consistent tailwind for markets due to implied volatility declining (i.e. VIX & the vanna trade) and put decay (i.e. charm). We think this could lead to a fairly substantial rally up >4200 by Friday.

Breaking down the current position, you can see that 400 SPY/4000SPX is still far and away the dominant strike on the board. These are put-heavy strikes, and so the decay of this position we again see as a tailwind for markets into Fridays. This is a large expiration as our models show >30% of total S&P gamma expiring, with 10-15% of total deltas. Further, our models do not show much resistance up to 4100.

The QQQ also has a very prominent position at 300, with >20% of total gamma + 20% of total delta expiring Friday. Recall that gamma’s depict at-the-money positions, with deltas being generated from in-the-money positions. Large put deltas expiring, we believe, is what can generate large short-cover rallies.

We still respect that “natural sellers” (i.e. non-options flows) can push this market lower, but we think the support from the options market grows into Friday and Monday. Absent some piece of materially negative news we’d look for tests <4000 to mean revert back into that key level as persistent options hedging flows overcome more temporary sellers. If the market cannot breach 4000 into Friday, then our current view suggests a window for a rally next Monday as put options roll off.