- Participants trade in a manner that is adding to the market’s bullish, positive gamma position.
- Absent an exogenous shock or event after which gamma position may shift drastically (e.g., OPEX), participants must add to their exposure at options strikes higher in prices and further in time (i.e., at and above $4,100 SPX).
S&P 500 Levels:
- $4,200 Resistance (Top Of Range)
- $4,150 Key Pivot (Middle Of Range)
- $4,075 Support (Bottom Of Range)
What To Watch:
- The trend of positive gamma building (at and above SPX $4,000 and $311 QQQ), which is likely to help pressure lower implied volatility, should remain into August OPEX, the monthly options expiration.
- Break below $4,000 invokes negative gamma, higher implied volatility, and potential for accelerated sell-off.
- Watch 1-month realized volatility (ref: 19, 8/2/22) as a baseline for IV (i.e. VIX). If RVcontinues to decline it implies IV can drag lower, which is a market tailwind.
Futures are holding flat to 4150 ahead of the 8:30 AM ET jobs report. For today, resistance shows at 4177 then the 4200-4215 (SPY Call Wall = 420) range. Support lines up at 4152 then 4115(SPY 410)-4100.
The big pivot strike for today is that 4150 line, which is particularly prominent in SPY 415 (shown below). Further we note 20-25% of S&P gamma (SPX+SPY) expiring today – most of which is concentrated in the 4150 to 4200 strikes. 20% is generally our bar for a material expiration – its of note here as this is a weekly expiration which doesn’t usually carry size like this. This expiration suggests we lose the 4150 pin into Monday.
While we may lose the 4150 pin into next week, we do not yet see a signal of the Call Wall rolling higher. This implies the top of our trading range will not shift up. Its certainly possible that, with a market-friendly jobs report today, market test the 4200 area. This may bring additional options flow >=420/4200 and a shift in the Wall. However, we will need to see Monday AM’s data to confirm.
To the downside a test of 4100 is also possible today without losing the bull trend. We are of the opinion that a break of 4100 leads to a retest of 4000. While a move under our Vol Trigger at 4075 would shift our models to a bearish stance, the size of open interest at 4000 make it the line of last resort. Losing 4000, we think, signals a retest of YTD lows.
Finally, we are getting a bunch of questions on this topic of realized volatility, spurred by some WSJ notes. We’ve done a bunch of writing on this over the past 2 weeks, specifically the daily note Wednesday, and this video & twitter thread from mid-July.
Also note too that the decline of realized volatility in longer time frames can be a trigger for different types of risk control/vol targeting funds. As a rough example, when 2 month realized volatility declines under 1 month volatility – it can be part of a “risk on” signal for these strategies (this is part of the reason why these alternative time frames are shown in our RV plot).
Here we’ve plotted the VIX vs 1 month RV. The VIX is a measure of implied, or future volatility and is based on traders expectations. Often times people hedge large events like FOMC and/or hold big put positions around expiration. Passing through those events generally acts as a release for implied volatility (i.e. panic subsides) and you can a rapid drop in VIX/IV. Because RV is a trailing window (in this case 30 days) it simply contains the volatility that the market has experienced. In theory RV is generally seen as a floor for implied volatility, which is why its decline is noted by traders.
The bottom line here is that markets are all about feedback loops. Once traders came around to this idea that OTM puts were too expensive (and/or we’re not going to pay off this year) then IV largely came for sale. Declining IVleads to a higher market, which further depresses IV.
Further, you can line up major market lows with large options expirations, which lead to a crushing of IV. However these major market lows (ex: Dec ’18 and Mar ’20) coincided with major monetary/fiscal support. Markets do not seem to have that stimulus-based support here.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.15%,||(±pts): 48.0||VIX 1 Day Impl. Move:1.36%|
|SpotGamma Imp. 5 Day Move:||3.12%||4130 (Monday Ref Px)||Range: 4002.0 | 4259.0|
|SpotGamma Gamma Index™:||0.79||0.84||0.01||0.02||-0.02|
|SpotGamma Absolute Gamma Strike:||4000||4000||415||12500||320|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4101||4098||0||0||0|
|Put Wall Support:||3900||3900||400||12500||290|
|Call Wall Strike:||4200||4200||415||11925||325|
|CP Gam Tilt:||1.26||1.12||0.93||1.24||0.87|
|Delta Neutral Px:||4056|
|25D Risk Reversal||-0.06||-0.07||-0.05||-0.06||-0.06|
|Call Open Interest||6,027,616||5,687,415||7,368,772||63,542||4,177,462|
|Put Open Interest||10,359,868||10,213,939||13,189,558||65,937||7,415,626|
|Key Support & Resistance Strikes:|
|SPX: [4200, 4150, 4100, 4000]|
|SPY: [420, 415, 410, 400]|
|QQQ: [325, 320, 310, 300]|
|NDX:[14000, 13000, 12500, 11925]|
|SPX Combo (strike, %ile): [4202.0, 4152.0, 4252.0, 4177.0, 4210.0]|
|SPY Combo: [419.14, 414.17, 424.11, 416.66, 419.97]|
|NDX Combo: [13338.0, 13537.0, 13378.0, 13125.0]|