Tag: MCPOC – Micro Composite Point Of Control

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Commentary

Daily Brief For November 23, 2021

What Happened

Overnight, yesterday’s knee-jerk sellers were emboldened by equity index futures auctioning sideways to lower with other products – from commodities to bonds – following suit. 

The prevailing narrative is that “[I]nvestors are reducing expectations for a deeper dovish stance by the Fed after Powell got a second term.” Meaningless headlines, like this, are precisely why we, as participants, should opt to avoid making short-term decisions based on the news!

Anyways, ahead is data on Markit Manufacturing and Services PMI (9:45 AM ET).

Graphic updated 6:30 AM ET. Sentiment Risk-Off if expected /ES open is below the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On weak intraday breadth and market liquidity metrics, the worst-case outcome occurred, evidenced by a spike below prices most recently accepted by S&P 500 traders.

Such activity denotes an obvious change in tone, as well as a potential willingness to start a trend in the opposite direction. 

To note, however, yesterday’s price action came alongside a few dynamics: (1) an increase in tempo after a failure to solicit more involvement on an initial attempt higher; (2) a volume delta that was in line with price action; (3) breadth (i.e., volume into stocks that are up versus those that are down) on the Nasdaq was negative, divergent from the positive breadth on the NYSE. 

Adding, the knee-jerk selling and associated price action left behind poor structure (i.e., participants will look to validate [or invalidate] the move, spending time below [or above] the $4,697.50 spike base). Caution warranted on validation of the spike. 

Graphic: Delta (i.e., committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in line with the price action of the SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of initiative trade (i.e., directional trade that suggests current prices offer unfavorable entry and exit; the market is seeking balance).

Context: The aforementioned trade is happening in the context of what was an unstable environment after Friday’s monthly options expiration (OPEX).

To recap, heading into OPEX, activity in options tied to the S&P 500 was concentrated in time and price. 

During this time – which I, alongside data and analytics providers like SpotGamma (go follow), surmise participants were betting the market would not move, selling-to-open call exposure – dealers/counterparties were left warehousing increased exposure to positive options gamma.

In hedging risks, dealers sold to open (bought to open) the underlying as the price rose (fell). 

This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It was expected to end after OPEX, as that options exposure rolled off. 

Monday, finally, there was an increase in range; the S&P 500, in particular, closed over 1.00% lower from its intraday high, weighed down by the Nasdaq 100 heavyweights and high flyers of the past weeks. 

Moreover, I was focused on two dynamics, primarily: (1) after OPEX, the absence of sticky and supportive hedging flows freed the market for directional resolve, and (2) according to SpotGamma, in light of recent exuberance, “participants [were] underexposed to downside put protection.”

The second part is slightly more important with regards to where we are today. 

As the exuberance in individual stocks fed into the stock indices themselves – the place where the world comes to hedge – participants weren’t as quick to add downside protection. No! Instead, they were more so selling to open (buying to open) downside (upside) protection.

Without getting too much into the dynamics of the exuberant positioning, the implications of this, nonetheless, are staggering. 

In short, should volatility continue to pick up, those participants (who were once exuberant) are likely to reach for protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more sensitive if we will.

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

Now, here is the kicker. 

If indices turn, and participants start reaching for out-of-the-money protection with positive exposure to gamma (i.e., buy put, market down, put rises in value), especially in shorter-dated expiries, then yes, there may be some near-term instability. 

Note that I said shorter-dated. 

Once that exposure rolls off the table (and/or is monetized), dealers/counterparties will reverse and support the market, buying-to-close existing stock/futures hedges to negative gamma positions. This flow is stabilizing and maybe the start of what is a seasonally-aligned rally into Christmas.

This last part is educated conjecture. It’s what I also feel as though would frustrate the most amount of participants. Basically, a quick wash (or sideways to lower), followed by a move higher into year-end. Be nimble and responsive!

Expectations: As of 6:30 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Scenario In Play: A spike marks the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

The spike may also be looked at as a pivot; in today’s case, the spike base is $4,697.50.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,711.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,740.50 minimal excess high and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.25 high volume node. Initiative trade beyond the HVNode could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Charts To Watch

Graphic: (NYSE: SPY). (S~$460, R~$471). S is for support. R is for resistance.
Graphic: (NYSE: QQQ). (S~$388, R~$402). S is for support. R is for resistance.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

DIX: For every buyer is a seller (usually a market maker). Using DIX — which is derived from short sales (i.e., liquidity provision on the market-making side) — we can measure buying pressure.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 22, 2021

What Happened

Overnight, equity index futures were sideways alongside the narrative that a strengthening dollar and the need to counteract inflation may endanger the rally in risk assets.

Ahead is data on the Chicago Fed National Activity Index (8:30 AM ET) and Existing Home Sales (10:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

To start, on weak intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

Taken together, the activity of the past two weeks or so signals participants’ willingness to position for directional resolve (i.e., trend) in the face of new information, and the like. 

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of concerns over peak liquidity and prevailing monetary frameworks. 

Specifically, as Bloomberg’s John Authers put it, the abundance of global liquidity, that stoked one of the best stock market recoveries in history, is in peril by the strengthening of the dollar and the need to counter inflationary pressures. 

“Obstinately low real yields help to explain why the threat to liquidity has as yet had minimal effect on the stock market. Higher real yields are the shoe that hasn’t dropped this year; investors need a clear plan of evasive action for such an eventuality. For now, liquidity, liquidity, liquidity is still keeping stocks going up, up, up.”

Some of this fear around monetary evolution, so to speak, though, has yet to feed into the pricing of equity market risk. Fear in one market tends to feed into the fear of another.

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg. This measure, on a relative basis, has diverged from the CBOE Volatility Index (VIX), which is a measure of implied volatility for equities, specifically the S&P 500. 

At the same time, we see a divergence in breadth.

Graphic: % of SPX stocks above their 200-Day Moving Average versus SPX, via indexindicators.com.

The takeaway here is that the SPX is sideways to higher while many of its constituents seem to not be participating in the most recent round of markup.

What factors are to blame for this? Two include an all-time high in buybacks, as well as extremes in speculation and upside volatility in heavily-weighted index constituents.

Adding, the S&P 500 closing last week pinned to the level at which dealers (i.e., those participants that take the other side of options trades and warehouse risk) exposure to positive options gamma was highest. 

Note that I talk about the implications options so much due to increased use and impact on underlying price, as a result of associated hedging. 

The aforementioned explains why the S&P can’t move; “If dealer hedging has suppressed index level volatility, but underlying components are still exhibiting idiosyncratic volatility, then the only reconciliation is a decline in correlation,” according to one paper by Newfound Research.

So trash breadth and a deceleration in equity inflows, coupled with exuberance (and upside volatility in heavily weighted index constituents) and clustered options positioning over the past weeks, is part of the reason why indices are sideways. Yes, to some extent.

Graphic: Per The Market Ear, “BofA points out the halt to inflows in market leaders such as tech, energy and financials. Basically, the “pillar of the pillar” of this market is fading. Do we still trust the seasonality pattern?”

The tone is to change, soon.

After OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve. 

According to SpotGamma, in light of recent exuberance, “participants are underexposed to downside put protection. Should these participants reach for long-gamma put exposures amidst volatility, there is a potential for a destabilizing, reflexive reaction on the part of dealers.”

The reason is, as volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling stock and futures into weakness. 

Cognizant of the risks, though, I end this section with the following. 

“[D]uring the 12-month period starting six months before and ending six months after a tightening cycle begins, the valuation of the S&P 500 has on average remained remarkably steady,” according to a post by The Market Ear.

At the same time, seasonality is great as, according to Callum Thomas, “Historically most of the time if the market closed up 20%+ for the year, the next year was also positive (84% of the time). As of writing, the market is up some 27% YTD (albeit, this year ain’t over yet!).”

Going forward, we shall monitor for the first signs of instability via spikes in the CBOE Volatility-Of-Volatility Index (INDEX: VVIX) and upward shifts in the VIX futures term structure.

Expectations: As of 6:20 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

We monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Given the passage of OPEX, we ought to give more weight to directional resolve (i.e., trend).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 19, 2021

What Happened

Overnight, equity index futures diverged as the S&P 500 attempted a breakout, failed, and rotated back into range, leaving some signs of excess (i.e., a proper end to auction) on the composite volume profile. Learn about the profile.

This comes ahead of a weighty options expiration that ought to resolve this market of the dynamics that promoted sideways trade over the past couple of weeks. Attention, after today, shifts to weakening breadth, seasonality, emerging fundamental nuances, and the like, as a result.

Ahead is some Fed-speak and no major economic releases. 

Graphic updated 6:15 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Yesterday, on nonparticipatory intraday breadth and market liquidity metrics, the best case outcome occurred; the S&P 500, after liquidating against a divergent volume delta (i.e., a metric that may reveal participants’ commitment to buying and selling as calculated by the difference in volume traded at the bid and offer) was responsively bought at its lows.

The low-of-day coincided with the $4,674.25 micro-composite point of control, the place at which two-sided trade was most prevalent over numerous day sessions, and the volume-weighted average price (i.e., the place at which liquidity algorithms are benchmarked and programmed to buy and sell) anchored from the Federal Open Market Committee (FOMC) event, weeks ago. 

The aforementioned activity left behind a double-distribution profile structure; participants initiated from one area of acceptance to another, closing just beyond what analysis provider SpotGamma sees is the options strike with the highest Absolute Gamma.

As discussed day after day, leading up to today’s monthly options expiration (OPEX), this cluster of options positioning was to restrain (i.e., make it difficult for) directional resolve.

The reason is, as OPEX nears and participants concentrate their activity on shorter-dated expiries (such as the one rolling off today), there’s an increased share who are willing to bet the market won’t move higher. In expressing this bet, participants opt to sell-to-open call exposure, for instance, leaving the counterparty/dealer warehousing exposure to positive options gamma. 

As this trend continues (and time to expiry narrows), dealers’ exposure to positive options gamma rises. In offsetting this risk, they sell to open (buy-to-open) the underlying as price rises (declines). This responsive buying and selling are what causes the market to balance (i.e., trade sideways) in a tight range. It ought to end after OPEX, as that options exposure rolls off. 

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance and not ready to break).

Context: The aforementioned trade is happening in the context of dynamics I touched on in weeks prior, as well as yesterday’s commentary. 

This is, specifically, the bond market’s pricing of risk.

According to Bloomberg, based on an “erratic … handling [of] large transfers of risk,” as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE), the bond market’s pricing of risk, so to speak, has diverged from the pricing of equity market risk, via the CBOE Volatility Index (INDEX: VIX).

Graphic: “The ICE BofA MOVE Index, which measures implied volatility for Treasuries, is close to the steepest level since April 2020,” via Bloomberg.

That said, fear in one market tends to feed into the fear of another; regardless of the cause, equity and bond market participants are not on the same page.

What is the fear all about? Well, at its core, the fear coincides with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

As asked, yesterday, in combating high inflation, policymakers ought to raise rates, right? 

That’s precisely what economists at institutions like JPMorgan Chase & Co (NYSE: JPM) believe may happen as soon as next September, earlier than once forecasted.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

In rounding out this section, I, again, want to mention the pinning in the broad market, as well as the performance of underlying constituents. If you’ve paid much of any attention, there is some bloodshed going on; breadth is divergent and the indices are sideways to higher, basically.

Graphic: Internally, the market is weak. Externally, via price, the market seems strong. 

The concern is that after OPEX, the absence of supportive vanna and charm flows (defined below), for which we can attribute some of the trends in extended day outperformance, alongside that sticky gamma hedging, so to speak, frees the market for directional resolve. 

Whether or not that resolve is up or down, we know that (as SpotGamma talks more about), participants are underexposed to downside protection. Should volatility pick up, these participants are likely to reach for that protection forcing dealers to reflexively hedge in a destabilizing manner. 

As volatility rises and customers demand out-of-the-money put protection, counterparties are to hedge by selling into weakness. The conditions worsen when much of the activity is in shorter-dated tenors where options gamma is more punchy if we will.

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

Expectations: As of 6:15 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Failure: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) nearly occurred on a higher time frame.

In monitoring for acceptance (i.e., more than 1-hour of trade) outside of the balance area, we saw an overnight rejection (i.e., return inside of balance). This portends a move to the opposite end of the balance. 

Given OPEX, though, we ought to give more weight to continued balance (i.e., sideways trade).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 high volume area (HVNode) puts in play the $4,723.50 overnight high (ONH). Initiative trade beyond the ONH could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 VPOC, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Gamma: Gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

Options: If an option buyer was short (long) stock, he or she would buy a call (put) to hedge upside (downside) exposure. Option buyers can also use options as an efficient way to gain directional exposure.

VPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure. 

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For November 18, 2021

What Happened

Overnight, equity indices auctioned sideways to higher as the bellwether S&P 500 continues to encounter difficulty in overcoming the forces associated with the large derivatives expiry, Friday.

One headline worth mentioning concerns JPMorgan Chase & Co’s (NYSE: JPM) prediction the Federal Reserve (Fed) will raise interest rates next September, earlier than expected. 

Ahead is data on jobless claims and the Philadelphia Fed manufacturing index (8:30 AM ET), leading economic indicators (10:00 AM ET), as well as Fed-speak scattered throughout the day.

Graphic updated 6:00 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by a Gaussian profile, as well as the balance and overlap of value in the S&P 500.

This activity, which denotes participants positioning themselves for directional resolve, is adding structure, a technically stabilizing dynamic, in short.

Graphic: Lackluster delta (i.e., non-committed buying/selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Amidst a rather large monthly options expiration (OPEX) this Friday, participants are having difficulty directionally resolving the S&P 500.

This is most visible by the S&P 500’s failure to move away from the $4,695.25 high volume area (HVNode), a level at which there is concentrated participation in the options market. 

As noted before, according to SqueezeMetrics, this level ought to be a magnet given hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.”

Moreover, yesterday, there was a note about the market’s reaction to what SpotGamma labels a Call Wall, the strike with the largest net positive gamma in the underlying stock. 

This Call Wall is a reflection of participants’ commitment to higher prices. Should that level continue to move up, then that confirms a willingness to do business, higher, so to speak. 

Since participants were able to roll their exposure to positive options gamma, higher in price and out in time, dealers have to hedge. This maintains that positive (stabilizing) dealer flow we talk so often about, which has bolstered this equity bull market.

Graphic: Via SHIFT, we see participants rolling call exposures to strikes out in time.

That leads us to a dynamic I briefly mentioned last week. After being brought to my attention again, yesterday, there is obviously more to unpack there. However, in keeping it short, I’ll hit on the basics.

The bond market’s pricing of risk, according to Bloomberg, based on an “erratic … handling [of] large transfers of risk” – as evidenced by the Merrill Lynch Option Volatility Estimate (INDEX: MOVE) – has diverged from the pricing of equity market risk via the CBOE Volatility Index (INDEX: VIX).

Fear in one market tends to feed into the fear in another; regardless of the cause, equity and bond market participants are not on the same page.

What does that mean?

At its core, the fear is in tandem with “broad uncertainty about the direction of the economy and monetary policy amid surging prices, labor shortages and yields that are holding well below the rate of inflation,” according to Bloomberg.

In combating high inflation, policymakers ought to raise rates, right? 

Well, that’s at least what economists at institutions like JPM believe may happen as soon as next September, earlier than once forecasted.

Rising rates, among other factors, have the potential to decrease the present value of future earnings, thereby making stocks, especially those that are high growth, less attractive to own.

As the market is a forward-looking mechanism, the implications of this seem staggering. 

Prevailing monetary frameworks and max liquidity promoted a large divergence in price from fundamentals. The growth of passive investing – the effect of increased moneyness among nonmonetary assets – and derivatives trading imply a lot of left-tail risks.

As Kai Volatility’s Cem Karsan once told me: “There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed,” or there is supply.

“At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Eventually, fear on the part of bond market participants may feed into equity market positioning.

Graphic: Via The Market Ear, in spite of earnings growth, buybacks, and seasonality, among other factors, Bank of America Corp (NYSE: BAC) sees large tech outflows. Fade as big tech starts to look relatively cheap?

Expectations: As of 6:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, just outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios: Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

VPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 17, 2021

What Happened

Overnight, equity index futures were divergent. This comes as there were no significant news catalysts and there is a weighty CBOE Volatility Index (INDEX: VIX) expiration today.

Ahead is data on building permits and housing starts (8:30 AM ET). Numerous Federal Reserve members are scheduled to speak today.

Graphic updated 5:45 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

When analyzing the composite (i.e., overnight and day time frame) volume profile, yesterday’s double distribution suggests participants initiated from one area of acceptance to another.

Amidst divergent intraday breadth and market liquidity metrics, the S&P 500 came back into range and participants defended the $4,695.25 high volume area (HVNode). This level corresponds with what options analysis provider SpotGamma says is a Call Wall.

Given an implosion in volatility over the past sessions, the Call Wall is a near-term magnet due to associated hedging.

“As realized volatility falls from its peak around a year ago, more sold SPX options cluster at strikes nearer to spot. And as implied volatility falls with it, the gamma of those options increases. More dealer long gamma means more liquidity. More liquidity means less movement.” – SqueezeMetrics

Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of what Goldman Sachs Group Inc’s (NYSE: GS) CEO David Solomon says is a market environment dominated by greed. 

“[T]here have been periods of time when greed has far outpaced fear — we are in one of those periods,” he said. “My experience says those periods aren’t long-lived. Something will rebalance it and bring a little bit more perspective.”

This comes as markets surge alongside historic amounts of stimulus, improvements in fundamentals (i.e., earnings), supply chain demand/supply imbalances, inflation, and more. 

Further, as stated over the past few commentaries, economic structures are different and we are not in the 1970s. That said, there are a few big dynamics that are of concern.

The first is that we see supply pressures beginning to ease as at-home inventory build-ups are expected to take away from consumption during the holidays (for which businesses are scrambling to stock). Ultimately, this may pressure commodity inflation.

Graphic: Via The Market Ear, Bridgewater shows supply returning to pre-COVID-19 levels as demand explodes, “creating an imbalance of a magnitude that we haven’t seen since the 1970s. What happened in the ’70s truly was a supply shock: supply collapsed, and demand stayed relatively steady. Today, demand is surging, and supply is also growing, but it just can’t keep up with demand.”

The second is this concept of the velocity of money slowing as participants extend moneyness to nonmonetary assets. This is primarily because of monetary policies and an environment of debt and leverage that ultimately cuts into asset price volatility. Overall, this dynamic adds to the prevailing risks of carry when volatility does rise and the demand for money pushes deflation.

Solomon adds: “Chances are interest rates will move up, and if interest rates move up that in of itself will take some of the exuberance out of certain markets.”

With prevailing monetary frameworks and max liquidity promoting a divergence in price from fundamentals, as well as the growth of passive investing and derivatives trading, we ought to have some concern for pending monetary evolution, so to speak. 

As Kai Volatility’s Cem Karsan once told me: “A lot of the processes that enforce these bubbles are embedded in the volatility market.”

“There’s this constant structural positioning that naturally drives markets higher as long as volatility is compressed, or there’s a supply of volatility.” However, “At the end of the day, though, the higher you go, the further off the ground you are and the more tail risk.”

Note: This structural positioning in the S&P 500 can be construed as customer long equity, long put, short call. This sort of positioning tends to leave the market in long-gamma whereby dealers buy into weakness and sell into strength. Amidst the decay in protection, dealers are to unwind their hedges (supply less liquidity), and this is a force that bolsters market price rises.

Even the slightest reduction in liquidity has the potential to prick the bubble, prompting a reaction that exacerbates underlying price movements; the response by customers, as well as the dynamics of dealers’ risk exposure to direction and volatility, ought to cut into liquidity and aid in an unraveling.

“It’s not a coincidence that the mid-February to mid-March 2020 downturn literally started the day after February expiration and ended the day of March quarterly expiration. These derivatives are incredibly embedded in how the tail reacts and there’s not enough liquidity, given the leverage, if the Fed were to taper.”

Case in point, the market’s reaction to prices near SpotGamma’s Call Wall. If participants were unable to roll that exposure to positive options gamma higher in price and out in time, dealers would not have to hedge. This cuts into dealers’ need to unwind hedges to customers’ options positions. This removes one positive (stabilizing) flow that has bolstered this equity bull market.
Graphic: Via SHIFT, we see participants potentially rolling call exposures.

We have seasonally-aligned inflows and earnings growth, among other things, bolstering the most recent rally to new highs. With this week’s implosion in implied volatility most noticeable at the front end of the VIX futures term structure, given the decay in shorter-dated customer protection, it may be an opportune time to hedge.

As The Market Ear stated yesterday, “Playing the term structure (i.e., [buying the] short end of the curve vs [selling] the longer part of the term structure curve) is becoming a rather cheap way to hedge some risks here.”

Expectations: As of 5:45 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

We shall monitor for acceptance (i.e., more than 1-hour of trade) outside of the prior day’s balance area (i.e., the price levels at which 70% of the day’s volume occurred). Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,695.25 high volume area (HVNode) puts in play the $4,711.75 regular-trade high (RTH High). Initiative trade beyond the RTH High could reach as high as the $4,735.25 and $4,765.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,695.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,647.25 HVNode and $4,619.00 untested point of control (VPOC), or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note that the S&P 500 is pinning at $4,695.25 amid what looks to be a cave-fill (i.e., the widening of the area deemed favorable to transact in by an increased share of participants). Learn about the profile.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Options Expiration (OPEX): Traditionally, option expiries mark an end to pinning (i.e, the theory that market makers and institutions short options move stocks to the point where the greatest dollar value of contracts will expire) and the reduction dealer gamma exposure.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 16, 2021

What Happened

Equity index futures auctioned sideways alongside no new fundamental catalysts.

Ahead is data on retail sales and import prices (8:30 AM ET), industrial production and capacity utilization (9:15 AM ET), the NAHB home builders’ index, and business inventories (10:00 AM ET), as well as Fed-speak at 12:00 and 2:30 PM ET.

Graphic updated 6:10 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On minimally divergent intraday breadth and unsupportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

This activity, which marks a potential willingness to continue balance, is adding strength to poor structure, a dynamic that is helping clear the market of technical instabilities.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: According to Morgan Stanley (NYSE: MS), the S&P 500 ought to be weighed down by slower earnings growth and rising yields. The firm’s chief U.S. equity strategist explains that risk and reward for broad indices look unattractive.

“[W]e think 2022 will finally bring the multiple compression we incorrectly forecasted for 2H 2021. Our 12-month target P/E of 18x is 15% below current levels but in line with the 5-year average and the top quintile for the past 30 years.” 

“The risk of de-rating has been deferred, not avoided, and makes our 12-month S&P 500 Bear/Base/Bull targets of 3900/4400/5000 unexciting.”

This comes alongside expectations that inflation – a product of strong demand – is likely to worsen but not disrupt deflationary trends, such as increased moneyness of nonmonetary assets, innovation, and the like. 

Graphic: Inflation ought to worsen before it cools, via The Market Ear.

Moreover, in terms of positioning, the CBOE Volatility Index (INDEX: VIX) was a touch higher, while demand came in across the front area of the VIX futures term structure. 

Obviously, the tone has changed a bit since last week; customer demand and exposure to very short-dated put protection declined. This was most noticeable in how the VIX term structure behaved over the past sessions. After shifting outward (mostly) in the front, a sign of demand for short-dated protection, the curve shifted back down, late last week.

So, while the initial pop (and hedging on the part of those dealers that warehouse customer options orders) was destabilizing, the term structure slid back into line and the removal of that short-dated protection had the effect of leading dealers to buy back short stock/futures hedges.

This stabilized the market. 

Thereafter, the market drifted back up to the level at which positive options gamma is highest, ahead of a fast-approaching monthly options expiration (OPEX). Into OPEX, dealers’ positive exposure to the risks of price movement, based on predominant positioning in the S&P, ought to increase. In hedging this exposure, dealers ought to supply the market with liquidity (i.e., sell stock/futures) which ought to dampen upside volatility.

So, presently, we’re in a bind and things ought to loosen after OPEX, allowing fundamental catalysts to play a bigger role in price discovery.

A way to play this dynamic is to structure some sort of options spread that applies the proceeds from a short option (which capitalizes on pinning and the rapid decay of soon-to-expire options) toward a long option further out in time. Learn about basic Calendar Spreads or see below.
Graphic: The risk profile of a long put calendar spread, via Fidelity.

Expectations: As of 6:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the lower part of a negatively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,674.25 micro composite point of control (MCPOC) puts in play the $4,695.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,711.75 all-time high and $4,735.25 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,674.25 MCPOC puts in play the $4,647.25 HVNode. Initiative trade beyond the HVNode could reach as low as the $4,619.00 VPOC and $4,590.00 balance area boundary (BAH), or lower.

As an aside, participants reclaimed the volume-weighted average price (VWAP) anchored from the all-time high and recent Federal Open Market Committee (FOMC) meeting.

This is a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Further, given that this development suggests the average buyer, since the all-time high, is in a winning position, who does this dynamic embolden? The buyer or seller?

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

A Quick Guide To Options

Options offer an efficient way to gain directional exposure. 

If an option buyer was short (long) stock, he or she could buy a call (put) to hedge upside (downside) exposure. Additionally, one can spread, or buy (+) and sell (-) options together, strategically.

Commonly discussed spreads include credit, debit, ratio, back, and calendar.

  • Credit: Sell -1 option closer to the money. Buy +1 option farther out of the money.
  • Debit: Buy +1 option closer to the money. Sell -1 option farther out of the money.
  • Ratio: Buy +1 option closer to the money. Sell -2 options farther out of the money. 
  • Back: Sell -1 option closer to the money. Buy +2 options farther out of the money.
  • Calendar: Sell -1 option. Buy +1 option farther out in time, at the same strike.

Typically, if bullish (bearish), sell at-the-money put (call) credit spread and/or buy a call (put) debit/ratio spread structured around target price. Alternatively, if the expected directional move is great (small), opt for a back spread (calendar spread). Also, if credit spread, capture 50-75% of the premium collected. If debit spread, capture 2-300% of the premium paid.

Be cognizant of risk exposure to direction (delta), time (theta), and volatility (vega). 

  • Negative (positive) delta = synthetic short (long). 
  • Negative (positive) theta = time decay hurts (helps).
  • Negative (positive) vega = volatility hurts (helps).

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For November 12, 2021

What Happened

Overnight, equity indices were flat-to-up while commodities and bonds were sideways to lower.

The prevailing narratives include the prospects of a Russian invasion of Ukraine, COVID-19 resurgence in the U.S., concerns over the pace of inflation and its impact on the economy, China developer debt payments, and the like. Your typical doom and gloom stuff!

Ahead is data on job openings, University of Michigan consumer sentiment, and five-year inflation expectations (10:00 AM ET).

Graphic updated 5:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas in the S&P 500.

This activity, which suggests participants’ willingness to position for directional resolve, comes alongside the presence of poor structure, a dynamic that adds to technical instability.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings growth, inflation, and more.

Graphic: “Whenever the market has been up 20%+ YTD through to October (like e.g. THIS YEAR), it has *always* had an up month in November (albeit with a n=8). Basically I would say it speaks to the momentum in the market, which despite the September stumble seems pretty much alive and well.” – Callum Thomas

On the topic of inflation, the October consumer price index (CPI) is worrisome, according to some. 

“We think it is time to rethink positioning related to inflation,” Citigroup Inc (NYSE: C) strategists led by Scott Chronert wrote in a note. “A focus on sectors and industry groups negatively correlated to inflation provides a contrarian opportunity.” 

Citi sees value in consumer and health-care stocks, as a result of negative correlations to CPI.

Despite the hot prints, the CPI doesn’t paint the entire picture; it’s too soon to change rate-hike calculations, according to the Federal Reserve’s Mary Daly. 

Graphic: U.S. inflation, expected Fed rate increases via Bloomberg. 

That thinking brings me back to recent comments made by Ark Invest’s Cathie Wood.

Mainly, Wood feels that inflation is on its way out with a decline in the velocity of money and increased moneyness of nonmonetary assets.

A prime example of this is inflation in housing; “Ivy Zelman of Zelman Research came out this week. She made a fantastic call on the housing bubble and bust starting in 05-06, and she was right, just a little early. She is very concerned that the housing prices we’re seeing right now are not sustainable,” because of speculation, as well as iBuying and private equity. 

“This is unsustainable … and I’m wondering if even the housing market inflation is going to give way, here,” Wood added. 

For now, with more of the same – bullishness in the face of moderating monetary policy, strong retail participation, seasonality, and buybacks supporting the valuations we’re at, now – what other narratives are there to add (or roll forward)?

Given my interest in the options market – because option volumes are comparable to stock volumes and related hedging flows, as a result, represent an increased share of volume in underlying stocks – I’m in the camp of “the market is fragile, given current positioning.”

According to SpotGamma, single-stock exuberance of the past weeks fed into the S&P complex, itself, evidenced by a lack of interest in put options at lower strikes; the S&P 500 options strike with the largest negative gamma – delta sensitivity to underlying price – failed to roll higher, while the strike of the option with the largest positive gamma did. 

This came as investors marked the S&P 500 up to the $4,700.00 strike, at which positive gamma – delta sensitivity to underlying price – is highest. 

“As volatility continues to decline, the gamma of those options, which are now at the money, ought to increase, forcing counterparties to supply more liquidity,” SpotGamma explained.

Therefore, coming into this week, $4,700.00 was expected to be a magnet (or resistance) into that aforementioned pre-monthly options expiration (OPEX) weakness.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

This was unless (1) volatility declined markedly, “a tailwind for the S&P complex as options slid[ing] down their term structure would cause dealers to continue covering their hedges in an asymmetric manner,” or (2) more capital was committed to options at higher strikes. 

Neither happened.

Instead, the CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure. This suggested a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Pictured: SqueezeMetrics highlights implications of volatility, direction, and moneyness. The left orange marker is reflective of a basic reaction to call-buying (as observed during the rise of meme stocks). The right orange marker reflects a reaction to put-buying (as observed during the COVID-19 sell-off).

The implications of customers now covering their levered, long-delta exposure and demanding out-of-the-money hedges may have the effect of forcing counterparties to hedge in a manner that exacerbates underlying price movement to the downside (e.g., Tesla).

With that single-stock exuberance still reflected by positioning in the S&P, itself, as SpotGamma said: “This sets us up for what may be a volatile pre- and post-OPEX week.”
Graphic: S&P 500 (INDEX: SPX) options activity for Thursday, November 11, 2021. SHIFT shows increased volume of put options in strikes prices at and below current prices.

Expectations: As of 5:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance-Break Scenarios: A change in the market (i.e., transition from two-time frame trade, or balance, to one-time frame trade, or trend) ought to occur on a break of day-session balance.

We monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,647.25 high volume area (HVNode) puts in play the $4,673.00 untested point of control (VPOC). 

Initiative trade beyond the VPOC could reach as high as the $4,695.25 micro composite point of control (MCPOC) and $4,711.75 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,619.00 VPOC. 

Initiative trade beyond the VPOC could reach as low as $4,590.00, a prior balance area high (BAH), and $4,574.25 HVNode, or lower.

To note, a breach of Wednesday’s low likely puts the S&P 500 in a short-gamma environment.

Those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma, they buy into strength and sell into weakness, exacerbating volatility. 

When dealers are long-gamma, they buy into weakness and sell into strength, calming volatility.

--

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Learn about the profile.

What People Are Saying

Definitions

Cave-Fill Process: Widened the area deemed favorable to transact at by an increased share of participants. This is a good development.

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Value-Area Placement: Perception of value unchanged if value overlapping (i.e., inside day). Perception of value has changed if value not overlapping (i.e., outside day). Delay trade in the former case.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Commentary

Daily Brief For November 11, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher, recovering much of yesterday’s fast-paced liquidation.

To note, overnight price changes aside, the Nasdaq 100 is trading weak, in comparison to the S&P 500, a dynamic most noticeable in underlying breadth metrics, and the like. 

Ahead, there are no material economic releases.

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

Coming into Tuesday’s session, participants knew that the S&P 500 had already undergone somewhat of a lackluster liquidation, Tuesday.

Those behind some of the downside velocity we saw were most likely short-term, momentum-driven participants who had poor location (i.e., those that respond to probes at visual references and lack the wherewithal to withstand major changes in tone).

To note, given the context – weak intraday breadth and market liquidity metrics bolstering an expansion of range below the volume-weighted average price (VWAP) anchored from the Federal Open Market Committee (FOMC) announcement, last week – the poor structure intact from the advance in past weeks remains a concern.

Graphic: Supportive delta (i.e., committed selling for most of the day as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap.

Context: Yesterday, I talked in-depth on the implications of high leverage and risk by short-term speculators’ record call buying and put selling. 

To recap, so long as implied volatility remained bid (and stock prices continued rising) – the result of inadequate liquidity – counterparties to highly speculative trades exacerbated upside volatility in their efforts to hedge. 

As implied volatility backed off, counterparties supplied an increasing amount of their underlying hedges, calming the pace of upside price discovery.

When the high-flying stocks (like Tesla, which is a large S&P 500 index constituent) finally made the turn, the bulk of customers’ short puts (long calls) quickly rose (declined) in value, trading in-the-money (out-of-the-money). 

Due in part to short-term speculators lacking the wherewithal to stay in their margin-intensive positions, as the price fell, put buying (covering of shorts, too) took liquidity and destabilized the market.

Graphic: SqueezeMetrics unpacks implications of short put options on the limit order book.

According to SpotGamma, the exuberance of the past weeks fed into the S&P complex, itself, evidenced by a lack of interest in put options at lower strikes. In other words, the S&P 500 options strike with the largest negative gamma – delta sensitivity to underlying price – failed to roll higher, while the strike of the option with the largest positive gamma did. 

With implied volatility declining into the S&P’s price rise, last week (a dynamic that, at least in recent history, leads into increased call selling, more dealer hedging, and liquidity, as well as further realized volatility suppression), associated hedging at those strikes pressured prices.

The upside was resisted and we pinned. 

Coming into this week, however, CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure. This suggested a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Graphic: Charting the CBOE Volatility-Of-Volatility Index (INDEX: VVIX) and the CBOE Volatility Index (INDEX: VIX). Though both were higher, expectations of the volatility of volatility rose. Participants are reaching for those highly “convex” options which have counterparties reacting in a manner that exacerbates underlying price movement.

The implications of customers now covering their levered, long-delta exposure and demanding out-of-the-money hedges has the effect of forcing counterparties to hedge in a manner that exacerbates underlying price movement to the downside. 

This was the concern. This is what we’re starting to see.

Typically, the period leading up to the monthly options expiration (OPEX) is weak (at least in recent times) and so this trend of lower price and higher intraday volatility may persist up until that event clears counterparties’ gamma exposure and frees the market to move, more.

That’s when fundamental context likely plays a more important role. 

According to a Barclays (NYSE: BCS) note featured by The Market Ear, earnings are a tailwind.

“Amid a potentially higher macro volatility regime, we expect earnings to remain a tailwind for equities in ’22. Given our economists’ forecast of above-trend GDP growth of 4.5%, our base case gives 14% EPS growth for Europe, vs. the IBES estimate of 7%. Sticky supply bottlenecks are a threat, but margins typically expanded when global growth was above 3%, while ULCs should remain low. With comps less easy now, sector contributions to EPS growth should be more balanced between Cyclicals and Defensives, but still higher for the former.”

At the same time, in the face of inflation rising at the fastest rate since 1990, we have strong retail participation, seasonality, and buybacks to support the valuations we’re at, now.

Graphic: Inflow mania continues, via The Market Ear.

Expectations: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a positively skewed overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,657.75 low volume area (LVNode) puts in play the $4,673.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,695.25 micro composite point of control (MCPOC) and $4,711.75 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,657.75 LVNode puts in play the $4,619.00 VPOC. Initiative trade beyond the VPOC could reach as low as $4,590.00, a prior balance area high (BAH), and $4,574.25 high volume area (HVNode), or lower.

To note, a breach of the prior day’s low likely puts the S&P 500 in a short-gamma environment. When dealers are short-gamma, they buy into strength and sell into weakness, exacerbating volatility. When dealers are long-gamma, they buy into weakness and sell into strength, calming volatility.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the low-volume structure beneath current prices. There is the potential for a cave-fill to widen the area deemed favorable to transact at by an increased share of participants. Learn about the profile.

What People Are Saying

Definitions

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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Categories
Commentary

Daily Brief For November 10, 2021

What Happened

Equity index futures sideways, overnight, on powerful derivative market forces, alongside participants’ aims to base ahead of added clarity on the economic outlook.

Ahead is data on inflation and jobless claims (8:30 AM ET), wholesale inventories (10:00 AM ET), and the monthly budget statement (2:00 PM ET).

Graphic updated 5:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

As evidenced by a b-shaped liquidation break profile distribution (i.e., morning drop on fast tempo, followed by sideways trade) there was likely selling by short-term momentum-driven participants who had poor location.

We are confident this may be the case given where the price is, relative to the volume-weighted average price (VWAP) anchored from the Federal Open Market Committee (FOMC) announcement, last week; the average buyer, since then, is losing.

To note, given the context – lackluster breadth and market liquidity metrics – the failure to expand the range, markedly, suggests there was no new money selling.

This activity, which marks a potential willingness to clear stubborn inventory and break balance, is occurring in the face of poor structure down below, a dynamic that adds to technical instability.

Graphic: Divergent delta (i.e., non-committed selling as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: Yesterday, I made an emphasis on some of the “high leverage and risk” short-term speculators’ record call buying and put selling posed on the equity market, at large.

That’s odd. Why? 

Well, into the near-vertical price rise of highly volatile stocks like Tesla Inc (NASDAQ: TSLA), customers (you and I) signed up, through the agency of counterparties, to add liquidity to the market, via options activity.

Graphic: Customers took on significant leverage in their purchase and sale of options, via SpotGamma.

So long as implied volatility remained bid (and stock prices go to the moon) – the effect of inadequate liquidity – counterparties were to exacerbate upside volatility in hedging their exposure to customer positioning. In other words, dealer short-gamma.

Note those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

When dealers are long-gamma (e.g., S&P 500), counterparties buy into weakness and sell into strength, calming volatility.

Enter shock – Elon Musk selling Tesla stock – alongside a decline in implied volatility, amidst a build of gamma at higher stock prices (which has the effect of dampening realized volatility), we saw the unthinkable happen; high-flying stocks (more so Tesla, which is a large S&P 500 index constituent) turned away from the moon and headed back to earth.

The implications of this were staggering; the bulk of customers’ short puts (long calls) quickly rose (declined) in value and traded in-the-money (out-of-the-money). 

As SpotGamma noted, yesterday, “[t]here was a serious dearth of liquidity to start today’s session,” and volatility rose, as a result, in compensating for that fact.

Now, if customer short put, counterparty long put. 

To hedge, counterparty ought to buy, right? Nope. 

As SqueezeMetrics explains, “Sold puts are, quite literally, a bunch of huge buy limit orders below the market, and then a bunch of liquidity-taking stop-losses further down.”

Graphic: SqueezeMetrics unpacks implications of short put options on the limit order book.

This is, to put it simply, due in part to short-term speculators lacking the wherewithal to stay in these margin-intensive positions; as price falls, put buying (covering of shorts, too) takes liquidity and destabilizes the market.

We’re starting to see this activity, in individual stocks, affect the S&P 500 complex, too. 

The CBOE Volatility Index (INDEX: VIX) was higher, with demand coming in across the front area of the VIX futures term structure, mostly; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

Graphic: Demand for options hedges comes in at the front end of the term structure.

That has already been reflected by the trend of outperformance in the extended day. 

In other words, the front-running of increasingly impactful (and supportive) vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk), seems to be changing, slowly. 

We’re (likely) opening sideways to lower today. That’s a change, for once!

With expectations that there may be a front-running of the monthly (OPEX) options expiration (into which the forces that promote pining usually turn stronger with counterparties supplying more liquidity as their long gamma rises), a time when dealer gamma exposure is to decline, allowing for increased realized volatility (as a result of less liquidity), the added demand for hedges (as evidenced by the bid in volatility and VIX term structure shift), is of concern. 

Participants have been uber bullish, up until early this week. Should sentiment turn, and (1) those participants cover their levered, long delta exposure alongside (2) new money hedging, tempo ought to quicken; an abrupt liquidation could be in the cards.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. 

In light of seasonality, buybacks, and earnings surprises, the potential for a rally into the end of the year remains strong. As a result, we start to look for big picture references where we may see responsive buying. See the graphic below!

Expectations: As of 5:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Balance Scenarios: Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,680.25 overnight high (ONH) puts in play the $4,695.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as high as the $4,711.75 regular trade high and $4,722.00 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,680.25 ONH puts in play the $4,658.75 overnight low (ONL). Initiative trade beyond the ONL could reach as low as the $4,619.00 untested point of control (VPOC) and $4,590.00 balance area boundary, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Note the low-volume structure beneath current prices. There is the potential for a cave-fill to widen the area deemed favorable to transact at by an increased share of participants. Learn about the profile.

Definitions

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Volume Areas: A structurally sound market will build on areas of high volume (HVNodes). Should the market trend for long periods of time, it will lack sound structure, identified as low volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test. 

If participants were to auction and find acceptance into areas of prior low volume (LVNodes), then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Subscribe
Categories
Commentary

Daily Brief For November 9, 2021

What Happened

Overnight, equity index futures were divergent.

The Nasdaq-100 led while the Russell 2000, which broke out of massive range, recently, slowed its pace of price discovery, trading relatively weak.

Ahead is data on the PPI (8:30 AM ET) and real household debt (11:00 AM ET).

Graphic updated 6:20 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. /ES levels are derived from the profile graphic at the bottom of the following section. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. Learn the implications of volatility, direction, and moneyness. SHIFT data used for S&P 500 (INDEX: SPX) options activity. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect

On lackluster intraday breadth and supportive market liquidity metrics, the best case outcome occurred, evidenced by the balance and overlap of value areas (i.e., where 70% of the prior day’s trade occurred, or +/- 1 standard deviation), at the current S&P 500 prices.

This activity, which marks a potential willingness to continue balance as participants seek new information to resolve on, is built on poor structure, a dynamic that adds to technical instability.

Graphic: Supportive delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade (i.e., rotational trade that suggests current prices offer favorable entry and exit; the market is in balance).

Context: The aforementioned trade is happening in the context of a lot of big-picture dynamics such as the growth of derivatives exposure and tail risk, the heightened moneyness of nonmonetary assets, trends in seasonality, buybacks, earnings surprises, and more.

The implications of these themes on price are contradictory.

To elaborate, on one hand, seasonality, buybacks, and earnings surprises have bolstered (and will continue to bolster) the most recent price rise, since early October. 

Similarly, participants are seeing a trend of outperformance in the extended day, due in part to the front-running of increasingly impactful vanna and charm flows (both of which are tied to the hedging of options exposure), as a result of increased options activity (which, at least at this juncture, exposes customers to high leverage and risk). 

I say “high leverage and risk” as a result of short-term speculators’ record call buying and put selling over the past weeks.

As stated in a SpotGamma note, yesterday, “Should there be an adverse move, those short-term speculators are likely to cover (sell) their short put (long call) positions as they lack the wherewithal (capital) to maintain exposure.”

With exposure concentrated in shorter-dated expiries, the November 19 monthly options expiration (OPEX) is somewhat of a concern for us.

The reason being?

Presently, the S&P 500 is pinned near options strikes at which positive options gamma – delta sensitivity to underlying price – is highest. 

I note those participants that take the other side of options trades will hedge their exposure to risk by buying and selling the underlying. 

When dealers are short-gamma (e.g., Tesla), they buy into strength and sell into weakness, exacerbating volatility. 

When long-gamma, counterparties buy into weakness and sell into strength, calming volatility.

Coming into OPEX, the forces that promote pinning turn stronger; counterparties supply more liquidity as their long gamma becomes longer (i.e., rises), so to speak. 

As OPEX is essentially a reset (or reduction) in dealer gamma exposure, participants ought to see an increase in realized volatility as a lot of the exposure that warranted dealers’ supply of liquidity comes off the table, thus necessitating less liquidity. 

Less liquidity means more movement. 

More liquidity means less movement. 

Get it?

With short-term speculators taking on the risks that we’re seeing them take on, and the prospects of a front-running of post-OPEX volatility – given that, according to Pat Hennessy, “OPEX week returns peaked in 2016 and have trended lower since” – there is a potential that adverse moves force those that are off-sides cover (sell) their short put (long call) positions, thereby exacerbating near-term volatility.

We see recent options activity reflected in a sideways to higher CBOE Volatility Index (INDEX: VIX) and shift up in the VIX futures term structure; both suggest a demand for hedges and a reduction in the flows (e.g., vanna) that support sideways to higher trade. 

“The moves have been large and the demand for upside in single stock land insatiable,” said Danny Kirsch of Cornerstone Macro LLC. “Single stock vols clearly feeding into the index.”

Expectations: As of 6:20 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Market Is In Balance: Current prices offer favorable entry and exit. Modus operandi is responsive trade (i.e., fade the edges), rather than initiative trade (i.e., play the break).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,692.25 micro composite point of control (MCPOC) puts in play the $4,722.00 Fibonacci. Initiative trade beyond $4,722.00 could reach as high as the $4,735.00 and $4,772.50 Fibonacci, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,692.25 MCPOC puts in play the $4,674.75 visual low. Initiative trade beyond the visual low (likely paid attention to by short-term, technically driven market participants who seldom defend retests) could reach as low as the $4,663.00 untested point of control (VPOC) and $4,619.00 VPOC, or lower.

Click here to load today’s updated key levels into the web-based TradingView charting platform. Note that all levels are derived using the 65-minute timeframe. New links are produced, daily.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures. Notice Monday’s “Cave-Fill” or the act of increasing the area deemed favorable to transact at by participants. This is most obvious by observing where the bulk of Monday’s distribution sits, relative to the pocket of low-volume left behind Friday’s trade. This is a positive development. Learn about the profile.

Charts To Watch

Graphic: (NASDAQ: TSLA). (S~1108, R~1187 to 1195). S is for support. R is for resistance. Looking to buy/sell responsively. 
Graphic: (NYSE: CMG). (S~1680, R~1820). S is for support. R is for resistance. Looking to buy/sell responsively.
Graphic: (NYSE: SPY). (S~456, R~471). S is for support. R is for resistance. Looking to buy responsively.
Graphic: (NASDAQ: QQQ). (S~382, R~403). S is for support. R is for resistance. Looking to buy responsively.

What People Are Saying

Definitions

Vanna: The rate at which the delta of an option changes with respect to volatility.

Charm: The rate at which the delta of an option changes with respect to time.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent in a prior day session. Participants will respond to future tests of value as they offer favorable entry and exit.

MCPOCs: POCs are valuable as they denote areas where two-sided trade was most prevalent over numerous day sessions. Participants will respond to future tests of value as they offer favorable entry and exit.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets.

Additionally, Capelj is a Benzinga finance and technology reporter interviewing the likes of Shark Tank’s Kevin O’Leary, JC2 Ventures’ John Chambers, and ARK Invest’s Catherine Wood, as well as a SpotGamma contributor, developing insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

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