Futures are higher to 4060. A resistance band sits above at 4090 (Vol Trigger), 4100 & 4010 (SPY 410). Support shows at 4051 then 4010.
Markets held a fairly tight range as markets digested the recent decline. IV came in a bit, as one would anticipate given the tighter market trading range. However, IV levels remain elevated and we believe this should continue to keep markets volatile.
As this is a put-controlled market, IV/vanna is a particularly important driver. Lower market prices & higher put demand will drive IV higher, which increases put values and therein dealer short hedges (more on this from last week, here). However, should markets stall, that IV will quickly drain off. Because IV is elevated, there can be a relatively large IV decline, which functions to propel markets higher. This happens as traders sell puts (both to open & close) and dealers buy hedges.
This high IV combines with negative gamma positioning (dealers buying rips, selling dips) to keep realized volatility elevated.
What’s also somewhat striking is absence of put buying. In last nights note we pointed out the large surge in large put buying last week, but this seemed contained to large Index put buyers (>50 lot transactions). There was no sign of larger put buying across equities.
Shown below is total US Options volumes, and you can see that put volumes (blue) remain at relative lows, with calls (orange) coming off of relative highs. This leads us to frame this recent decline more as mean reversion from speculative highs – that +10% August rally was marked by short dated flow driven by short covering & meme activity.
The point here is this doesn’t read like a fearful market, as there was little little follow through to last weeks selling both in terms of price action and options positions.
Finally, we note that two of our major positional indicators (Vol Trigger 4090 – flat, Put Wall 4000 – higher) showed no signal of increased put buying yesterday. In fact, the Put Wall shifting higher is linked to higher forward equity prices in the next 2-3 sessions.
So, while we digest the recent move lower there may appear to be a session or two of relative calm, but there is plenty of fuel to produce larger swings. Currently, 4000-4100 is a “neutral zone”. Looking forward we would favor a long position on a break >4100, and be bearish on a move <4000.
|SpotGamma Proprietary SPX Levels||Latest Data||SPX Previous||SPY||NDX||QQQ|
|SpotGamma Imp. 1 Day Move:
Est 1 StdDev Open to Close Range
|1.08%,||(±pts): 44.0||VIX 1 Day Impl. Move:1.65%|
|SpotGamma Imp. 5 Day Move:||2.85%||4058 (Monday Ref Px)||Range: 3943.0 | 4174.0|
|SpotGamma Gamma Index™:||-1.05||-0.97||-0.37||0.01||-0.16|
|SpotGamma Absolute Gamma Strike:||4000||4000||400||12500||300|
|Additional Key Levels||Latest Data||Previous||SPY||NDX||QQQ|
|Zero Gamma Level:||4131||4141||420.0||12360.0||328|
|Put Wall Support:||4000||3900||400||11000||300|
|Call Wall Strike:||4400||4400||420||13250||325|
|CP Gam Tilt:||0.75||0.68||0.52||1.05||0.47|
|Delta Neutral Px:||4088|
|25D Risk Reversal||-0.07||-0.08||-0.07||-0.07||-0.08|
|Call Open Interest||6,142,160||6,078,368||7,169,330||61,673||4,214,276|
|Put Open Interest||10,546,233||10,513,029||12,315,336||78,397||7,443,685|
|Key Support & Resistance Strikes:|
|SPX: [4150, 4100, 4000, 3900]|
|SPY: [410, 405, 400, 390]|
|QQQ: [310, 305, 300, 290]|
|NDX:[13250, 13000, 12500, 12000]|
|SPX Combo (strike, %ile): [3999.0, 3950.0, 4051.0, 3975.0, 3926.0]|
|SPY Combo: [399.41, 394.58, 404.64, 396.99, 392.16]|
|NDX Combo: [12310.0, 12509.0, 12709.0, 12222.0, 12135.0]|