Futures are at 3991, staged just below large 4000 strike resistance. We look for this 4000-4010 (SPY 400) level to hold as it is the Call Wall for both SPY/SPX. Support shows at 3979 & 3950.
4000 should be considered a magnet here as much as a resistance line. We do see light positive gamma above this level, but we would favor mean reversion back into this strike(s) if markets pull away. You can see how prominent these 400/4000 strikes are in the these plots:
The other factor here is implied volatility. Voltied to pre-FOMC expirations continues to be crushed. This creates a further chasm (i.e. contango) with post-FOMC vol. This is seen below, and is one of the reasons we see IVshifting from equity tailwind to headwind (i.e. we don’t think pre-FOMC vol can get much lower). Again we highlight this short dated vol draining off just as we hit strong 4000 SPX resistance.
Finally, there is a lot of chatter around about large VIX positions at strikes >40. Most of this open interest is at the 75-85 strikes and out in October/November. These positions would certainly hedge some tail risk, but require convexity to pay off. In other words you need a major volatility spike that is most often associated with limit-down equity moves.
As we all know this type of move has not happened this year, despite large equity drawdowns. Thats made these hedges rather worthless. We believe this lack of tail move is part of the reason equities have recently bottomed – it was clear traders were starting to sell deep OTM puts likely spurred on by the fact that they didn’t pay off YTD.
Interestingly, its those OTM puts which have a similar payoff structure to >40 strike VIX calls.
There is a well known axiom “hedge when you can, not when you have to”, and we think that this tail protection has simply hit prices that make it interesting from a risk/reward perspective.
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|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.23%,||(±pts): 49.0||VIX 1 Day Impl. Move:1.45%|
|SpotGamma Imp. 5 Day Move:||3.05%||3861 (Monday Ref Px)||Range: 3744.0 | 3979.0|
|SpotGamma Gamma Index™:||0.40||0.1||0.03||0.02||0.00|
|SpotGamma Absolute Gamma Strike:||4000||4000||400||12500||300|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||3979||3970||0||0||0|
|Put Wall Support:||3700||3700||370||11500||280|
|Call Wall Strike:||4000||4050||400||11925||310|
|CP Gam Tilt:||1.14||1.05||0.95||1.3||0.92|
|Delta Neutral Px:||4025|
|25D Risk Reversal||-0.05||-0.05||-0.05||-0.07||-0.07|
|Call Open Interest||5,446,135||5,535,683||6,951,054||57,506||4,163,324|
|Put Open Interest||9,656,297||9,476,045||11,584,150||57,415||6,674,601|
|Key Support & Resistance Strikes:|
|SPX: [4100, 4000, 3950, 3900]|
|SPY: [400, 398, 395, 390]|
|QQQ: [310, 305, 300, 290]|
|NDX:[14000, 13000, 12500, 11925]|
|SPX Combo (strike, %ile): [3999.0, 4051.0, 4099.0, 4011.0, 4007.0]|
|SPY Combo: [398.79, 403.97, 408.76, 399.99, 399.59]|
|NDX Combo: [12733.0, 12317.0, 12935.0, 12645.0, 12518.0]|