Futures have slid higher to 4160. Resistance is at 4200, with a pivot area at 4160 (SPY 415) to 4150. Support lies down at 4110 (SPY 410). Our S.G. volatility forecast remains fairly tight with a 1% max move (open/close).
Futures did have a sharp 2AM ET pop to 4185, that move is now fading back into the large 415 SPY strike (4160). It seems as if markets will again be quiet for today, as we await Fridays 10AM Powell speech. This likely triggers the next major directional move, with 4300 to 4000 our targets into next week.
We see little reason to shift from our forecast from yesterday (read here) as there has been little change in positioning or IV.
As markets wait for the Powell queue, we wanted to zoom out some to refresh the larger options landscape. The most interesting relationship remains between that of bond IV & equity skew.
Whats interesting here is the MOVE Index (dark blue line) is a reflection of ATM Treasury options IV, which suggests there is no real skew to the reading (i.e. OTM options aren’t included). This is different from that of the VIX or VVIX (teal line) which considers all strikes (both OTM & ATM). To more equally compare equity vol to the MOVE we’ve plotted VOLI (orange) which is akin to the VIX, but only shows ATM SPY options.
Looking forward this seems to highlight that traders are anticipating markets to remain volatile, but contained. Arguably this is the type of price action we’ve seen for most of this year. This view on volatility is interpreted through an elevated VOLI (i.e. off 2022 lows) but a VVIX/SDEX that is pegged down at 2020 lows (pre-Covid-Crash). If traders we’re concerned of tail risk type moves we’d likely see VVIX/SDEX well off of YTD lows.
We think this idea of skew & tail risk is an interesting one to consider ahead of the Fed update, and what will be a large September quarterly OPEX. Without some major credit even, we think the changes of equity tail risks remain low and that may be what skew is reflecting (i.e. low demand for deeper OTMoptions). That does not mean that we can’t maintain elevated levels of volatility.
As many of you know, we believe that with each options expiration a new 30 day cycle starts. On OPEX, large options positions expire, and the market resets. From there options positions rebuild into the next monthly OPEX.
These options positions tend to reinforce price trend, with increased call positions eventually snuffing our volatility into the next monthly expiration. Conversely, when the positioning is predominantly put positions, volatility may build into monthly expiration as dealers more rapidly adjust negative gamma hedges.
We think that the price action into August was representative of these cycles. Call hedging flows and other positional flows (CTA, Vol Targeting, meme-chasing) influenced upside price action.
Our models suggest that Powell may spark a new cycle here, which builds into Sep 16th expiration.
Its possible that Jackson Hole starts a market move higher, however we think that upside volatility would decrease sharply into 4300. This may lead to more dull markets, akin to August.
The larger risk here is that if Powell upsets markets, we may well see a more rapid uptick in volatility as large put positions grab hold, which creates a reflexive downward spiral into September OPEX. To this point we saw large drawdowns into both March and June quarterly expirations as shown below.
Admittedly these lines were drawn in an arbitrary fashion, but it was done so to highlight a point. We’ve felt for some time that the options pricing often doesn’t reflect the volatility potential embedded in these feedback loops.
While no one knows what Powell will say (or how the market will react), this exercise is about weighing the possible outcomes. In this case we think that if there is downside, it can be more violent than the market is pricing based off of these feedback loops.
This is where we think our edge may lie, not only in these situations but also those like single stock gamma squeezes, and large expirations.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.05%,||(±pts): 43.0||VIX 1 Day Impl. Move:1.44%|
|SpotGamma Imp. 5 Day Move:||2.77%||4228 (Monday Ref Px)||Range: 4111.0 | 4345.0|
|SpotGamma Gamma Index™:||-0.15||-0.6||-0.21||0.03||-0.11|
|SpotGamma Absolute Gamma Strike:||4000||4000||420||13250||325|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4180||4186||422.0||12317.0||330|
|Put Wall Support:||3900||4000||400||11000||300|
|Call Wall Strike:||4300||4300||420||13250||325|
|CP Gam Tilt:||0.96||0.86||0.69||1.33||0.61|
|Delta Neutral Px:||4075|
|25D Risk Reversal||-0.06||-0.07||-0.06||-0.06||-0.07|
|Call Open Interest||6,064,018||5,991,102||7,052,064||61,733||4,118,512|
|Put Open Interest||10,318,914||10,477,442||12,143,873||73,848||7,162,664|
|Key Support & Resistance Strikes:|
|SPX: [4200, 4150, 4100, 4000]|
|SPY: [420, 415, 410, 400]|
|QQQ: [325, 320, 310, 300]|
|NDX:[13500, 13250, 13000, 12500]|
|SPX Combo (strike, %ile): [4199.0, 4050.0, 4075.0, 4248.0, 4104.0]|
|SPY Combo: [419.46, 404.57, 407.05, 424.43, 409.95]|
|NDX Combo: [13254.0, 12711.0, 12918.0, 12789.0]|