Futures are flat to 4150, but off of overnight lows of 4118. We see a fair amount of negative gamma in the SPX, but heavy negative gamma in SPY & QQQ. This infers that today will be another high volatility session, with both 4100 support & 4200 resistance in play for today.
Yesterdays selloff did not seem to invoke a large amount of put demand despite the market decline. There was a bid to IV, as noted in our Risk Reversal metric which closed at -0.06 (below). However, there was certainly no signal of fear, more off a shift from last weeks uber-bullish IV readings. Ultimately, the price action read like a post-OPEX adjustment.
The issue now is that markets have moved low enough to break the reflexive “buy the dip” behavior, in favor of larger directional trading swings.
Larger swings is the type of behavior that we’d anticipate in this negative gamma environment, particularly one in which there isn’t a clear reason to short volatility. Dealers behavior here should be to continue selling declining markets and buying rising markets – aka trading with the prevailing market trend.
This is implied in the vanna model below (right graph), which has a right skew. In today’s environment, our model forecasts that dealers will have to sell futures as markets decline and IV increases. Compare this to last week (left) wherein we had the mirror image position – lower SPX prices and increasing IV led to dealers buying market declines and selling rallies.
Recall that last week we had large call positions and were testing the Call Wall. In today’s negative gamma environment we are more under the control of put options. The former leads to tighter trading ranges, and therein lower volatility. The latter leads to higher volatility.
Because of Jackson Hole later this week (25th- 27th), there is little reason for markets to snap this negative gamma/elevated IV environment. Traders don’t want to be short IV in through FOMC events, and that removes one key source of “rally fuel”. On the flip side we did not see signs of high put demand which would likely pressure markets lower.
Mixing in with this idea that traders don’t want to be short longer dated IV, there are numerous expirations this week that, if IV shifts higher, may become enticing enough to short. This likely keeps price action choppy and a bit tense in through the rest of this week.
Zooming out in time, we think that into next week there is little resistance to prevent a move up to 4300 or down to 4000. Both levels are about 3.5% away, with no major gamma strikes in between.
| SpotGamma Proprietary SPX Levels | Latest Data | SPX Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Ref Price: | 4139 | 4137 | 413 | 12890 | 314 |
| SpotGamma Imp. 1 Day Move: Est 1 StdDev Open to Close Range |
1.07%, | (±pts): 44.0 | VIX 1 Day Impl. Move:1.51% | ||
| SpotGamma Imp. 5 Day Move: | 2.77% | 4228 (Monday Ref Px) | Range: 4111.0 | 4345.0 | ||
| SpotGamma Gamma Index™: | -0.50 | 0.21 | -0.22 | 0.02 | -0.13 |
| Volatility Trigger™: | 4175 | 4225 | 415 | 12975 | 322 |
| SpotGamma Absolute Gamma Strike: | 4000 | 4000 | 415 | 12500 | 310 |
| Gamma Notional(MM): | -366.0 | -484.22 | -1118.0 | 4.0 | -790.0 |
| Additional Key Levels | Latest Data | Previous | SPY | NDX | QQQ |
|---|---|---|---|---|---|
| Zero Gamma Level: | 4178 | 4208 | 425.0 | 12291.0 | 337 |
| Put Wall Support: | 3900 | 4000 | 400 | 11000 | 300 |
| Call Wall Strike: | 4300 | 4300 | 430 | 13250 | 350 |
| CP Gam Tilt: | 0.87 | 0.75 | 0.66 | 1.3 | 0.55 |
| Delta Neutral Px: | 4074 | ||||
| Net Delta(MM): | $1,690,149 | $1,686,586 | $194,122 | $51,134 | $103,290 |
| 25D Risk Reversal | -0.06 | -0.06 | -0.07 | -0.05 | -0.07 |
| Call Volume | 487,883 | 450,080 | 1,603,797 | 6,649 | 682,907 |
| Put Volume | 905,651 | 860,180 | 2,715,783 | 8,892 | 1,075,813 |
| Call Open Interest | 5,988,870 | 5,890,469 | 6,870,165 | 61,003 | 3,846,462 |
| Put Open Interest | 10,158,360 | 10,184,461 | 11,867,696 | 70,762 | 7,001,818 |
| Key Support & Resistance Strikes: |
|---|
| SPX: [4300, 4200, 4100, 4000] |
| SPY: [420, 415, 410, 400] |
| QQQ: [330, 325, 310, 300] |
| NDX:[14000, 13250, 13000, 12500] |
| SPX Combo (strike, %ile): [4052.0, 4077.0, 4106.0, 4201.0, 4102.0] |
| SPY Combo: [404.67, 407.15, 410.04, 419.55, 409.63] |
| NDX Combo: [13251.0, 12710.0, 12916.0, 13123.0] |
