Macro Theme:

• Rallies into June OPEX should be categorized as “short covering” and subject to failure.
• We look for “positive drift” into 6/30 expiration, $4000 is our major upside level into 6/30 June OPEX.
• The $3600 JPM 6/30 short put strike (3620) is our major downside support into June 30th.
• 6/30 exp removes large put positions and may expose the market to further downside into July

Daily Note:

Futures are holding near recent highs of 3790. Not much shifted in our levels overnight, and therefore we today look for similar trading action to that of yesterday. Resistance shows at 3800 then 3900. Support shows at 3700.

Recall that with June OPEX the options board was wiped clean and things have been slow to rebuild. To this point you may notice that our levels are rather spread out (i.e. support and resistance levels are 100 handles apart) the last few sessions, despite the somewhat contracted SG Implied Vol estimates of ~1%. This is due to relatively small size at various gamma bars.

There is a threshold of size that must be met for us to mark a level as support or resistance, and many strikes are not hitting this requirement. Therefore, while we see resistance and support ~100 handles from here, we don’t see a move of that size for today due to our model forecasting a 1% move.

This spacing in itself is a signal, suggesting traders don’t want to position much around current S&P levels. We’ve detailed here that there was a healthy amount of both put buying and selling over the past week, and call buyers aren’t moving the needle. We’ve been unimpressed with this move higher, to say the least.

Currently the call action seems to be centered around the 3800 strike. Yesterday there was 80k of volume at that strike, leading to a net OI increase of 20k. With the catalyst of last Fridays OPEX behind us, we start to watch this 4000 strike as our new “best case” scenario into 6/30 OPEX, but that is ~6% higher and increasingly unlikely with each passing day (quarterly OPEX is only 5 sessions out).

Ultimately we’re left in no-mans-land, with not much edge here. We presented this outline last week which highlighted market movement over the March expiration + FOMC (top left green circle). A similar move is still in play here, and we’re watching for “positive drift” into next weeks quarter end expiration. While the upside is unimpressive, that does not necessarily make it a great short play.

Recall that its likely dealers are at a minimum long the June 30th 3620 put strike (again, data suggests there is more put shorting) which is padding downside movement here (dealers are long the put and can buy back futures against it). We’re still of the opinion that the market becomes exposed to more downside after quarterly OPEX as these JPM puts are removed.