Futures have reversed gains from yesterday, with ES trading at 3930. For today we see resistance in the 4115(SPY 400 equivalent) – 4000 area. Support shows at 3900, and through that level we see 3960 (SPY 385).
The pullback in futures is according to our OPEX plan, wherein we estimated a rally into the 4000 area to due to the unwind of put hedges. Because we believe dealers had to cover short hedges one could frame the run from 3900-3980 as short covering.
With the OPEX flows behind us (and “forced” dealer hedge covering) markets now have to wrestle with more disastrous earnings: SNAP -30% pre-market.
Looking forward all eyes will shift toward the massive “expiration week” of June 13th-17th. The current size of that VIX exp + OPEX could provide a significant lift to markets. Added to the mix is a critical 6/15 FOMC meeting. The strength of the OPEX fuel is directly related to how low the S&P500 is, as lower markets likely build up larger dealer short positions.
If we map this out, it matches the Feb to March expirations. While Feb did clear some put positions, the bulk of puts were tied to the quarterly March expiration (3rd Friday) which led into the March quarter end expiration. Note how the trading in that Feb-March period probed lower several times, but mean reversion was strong.
Traders did not want to punt away their put positions before March OPEX + FOMC, and we think that’s the case with June FOMC, too (6/15).
We think it could be a similar situation here as markets may grind lower to the 3700 area off of May OPEX, but with strong bounces along the way. This is opposed to a major “limit down” market which coincides with new highs in the VIX.
On this point, despite May OPEX, we do not see any reason for VIX to shift violently higher and/or break from its recent behavior (i.e. strangely “muted”). This would change if there is a major deterioration in credit markets (i.e. defaults) & geopolitical events which we think would lead to a round of aggressive put buying. Barring that, we still see this market as “fully loaded” with puts as shown by the Delta Tilt indicator below (green line).
In summary while clearly much can happen between now and June OPEX, we think that 4000 will act as resistance, with 3700 a major support line. We assign an edge to markets remaining in that lower window as we do not think there is a compelling “risk on” trigger until June FOMC + OPEX.
However, if we do break higher >4000 into June traders should note the 4300 area as the place wherein negative gamma dealer flows greatly reduce (~4300 Vol Trigger and 4285 long put strike of the June JPM collar).
|SpotGamma Proprietary Levels||Latest Data||Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.26%,||(±pts): 50.0||VIX 1 Day Impl. Move:1.79%|
|SpotGamma Imp. 5 Day Move:||2.92%||3901 (Monday Ref Px)||Range: 3787.0 | 4015.0|
|SpotGamma Gamma Index™:||-1.31||-1.76||-0.21||0.00||-0.08|
|SpotGamma Absolute Gamma Strike:||4000||4000||400||11800||300|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4201||4264||0||0||0|
|Put Wall Support:||3700||3700||380||12000||280|
|Call Wall Strike:||4500||4700||408||11800||312|
|CP Gam Tilt:||0.64||0.63||0.58||1.12||0.6|
|Delta Neutral Px:||4184|
|25D Risk Reversal||-0.06||-0.08||-0.06||-0.08||-0.08|
|Call Open Interest||5,767,102||5,614,309||6,584,207||60,318||4,425,185|
|Put Open Interest||9,689,521||10,052,093||10,115,281||52,049||6,090,446|
|Key Support & Resistance Strikes:|
|SPX: [4200, 4100, 4000, 3900]|
|SPY: [400, 390, 385, 380]|
|QQQ: [310, 300, 290, 285]|
|NDX:[12500, 12025, 12000, 11800]|
|SPX Combo (strike, %ile): [4001.0, 3897.0, 3949.0, 3873.0, 3925.0]|
|SPY Combo: [399.66, 389.34, 394.5, 386.96, 392.12]|
|NDX Combo: [11802.0, 11682.0, 11886.0, 12295.0]|