Heading into this pivotal week, futures are down 2% to 3800. We obviously look for high volatility today, with support at 3800 then 3700. Resistance is at 3900 then 3950.
The market focus is undoubtedly about rates and the fluid assessment of Wednesday’s FOMCannouncement. Friday’s CPI print changed the range of Fed outcomes and with that the expected distribution of S&P prices.
Accordingly, the effect of this weeks large options expirations on churning macro flows is “jump risk”. There were all of these seemingly benign put options ( + vix calls) withering away when suddenly Friday’s inflation surprise energized them. You can see that depicted below in the SPX term structure wherein the fairly flat IV curve Friday leapt to a big backwardation today. Traders suddenly started grabbing short term protection and are now having to “pay up” for protection.
The question then turns to this weeks two big options events and their impact(s).
First, in regards to Wednesdays VIX expiration, its clear that the lower bound near 24/25 that we highlighted for some time is clearly no longer in play. All of that put interest <=25 still exists but focus likely now shifts to the call side wherein sizeable positions appear near 30 & 32. We’re watching for this 30-32 VIX level into Wednesday AM.
We’d noted several times recently that the market had rallied sharply on the Tuesday before the previous two VIX expirations (April, May). The setup for that to happen here seems not as clear. This is primarily due to the removal of the sharp contango in the VIX term structure as shown below.
You can see that the VIX term structure held a sharp contango last week wherein the front month VIX future was well below that of second VIX future. This was due to the FOMC event, wherein the front month was tied to Wednesdays 9AM ET expiration. Recall the FOMC is Wedensday at 2pm, and so the front month future does not capture the FOMC event risk, while month 2 did.
Currently that VIX structure is very flat, and the removal of that contango may limit the flow that induced those prior pre-VIX expiration rallies. That doesn’t mean markets cannot recover for other reasons, it just suggests we don’t see the same VIX-led setup as April/May.
On the equity side, the power of OPEX is inversely correlated to the price of the S&P. The lower that markets go into OPEX the more put delta increases. This may invoke larger dealer short hedges, much of which has to unwind into/out of OPEX. Therefore this drop in the S&P from 4150 to 3800 has added a great deal of size to 6/17 expiration puts, and time decay and IV are likely to hold through FOMC (Fridays options are likely to hold value due to the Fed event risk).
This indicates that charm & vanna will unleash on Wednesdays 2pm ET FOMC announcement. We’d also highlight the big 6/17 expiration downside strike to watch is 3700.
We think that down into that 3700 strike is where options flows shift from “inducing” volatility to “reducing” volatility which is what marks it as a lower bound.
Whats also interesting about this is that the lower equity prices go pre-FOMC the more hawkish the Fed has to be to spark a sustained selloff. In other words, lower stock prices are already a reflection of higher rates and so the Fed has to exceed these new, elevated rate expectations to spark another equity leg lower.
The net summary is this: We believe that options expiration will invoke a rally, but the timing of this is path dependent. Should the FOMC be perceived as “mild” then the put rally fuel could be drawn into Thursday & Friday. Should the Fed spark further selling into Friday, then we would look for a Monday short term low to be put in for markets, with a rally early next week.
Ultimately this expiration is clearing out a lot of equity put protection, which clears the way for lower-lows in the weeks ahead.
|SpotGamma Proprietary Levels||Latest Data||Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.22%,||(±pts): 48.0||VIX 1 Day Impl. Move:1.77%|
|SpotGamma Imp. 5 Day Move:||2.49%||3900 (Monday Ref Px)||Range: 3803.0 | 3997.0|
|SpotGamma Gamma Index™:||-1.90||-1.56||-0.40||0.01||-0.13|
|SpotGamma Absolute Gamma Strike:||4000||4000||380||11800||300|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4155||4231||0||0||0|
|Put Wall Support:||3800||4000||380||12000||280|
|Call Wall Strike:||4200||4200||450||11800||310|
|CP Gam Tilt:||0.54||0.46||0.4||1.25||0.47|
|Delta Neutral Px:||4108|
|25D Risk Reversal||-0.05||-0.07||-0.06||-0.07||-0.07|
|Call Open Interest||6,387,002||6,297,085||7,212,008||74,388||4,793,118|
|Put Open Interest||10,167,095||11,163,176||11,766,136||61,446||6,999,075|
|Key Support & Resistance Strikes:|
|SPX: [4000, 3950, 3900, 3800]|
|SPY: [400, 390, 385, 380]|
|QQQ: [300, 290, 285, 280]|
|NDX:[12500, 12100, 12000, 11800]|
|SPX Combo (strike, %ile): [3885.0, 3787.0, 3834.0, 3931.0, 3857.0]|
|SPY Combo: [388.25, 378.51, 383.18, 392.93, 385.52]|
|NDX Combo: [11797.0, 11679.0, 11880.0, 12081.0]|