Tag: Short Gamma – Sell Dip & Buy Rip

Daily Brief For January 6, 2022

Post author By Renato L. Capelj
Post date January 6, 2022
No Comments on Daily Brief For January 6, 2022

The Daily Brief is a free glimpse into the prevailing fundamental and technical drivers of U.S. equity market products. Join the 200+ that read this report daily, below!

What Happened

Equity index futures were lower on some hawkish commentary from the Federal Reserve.

Ahead is data on jobless claims and trade deficit (8:30 AM ET), the ISM services index, factory orders, and core capital goods orders (10:00 AM ET), as well as Fed-speak (1:15 PM 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

Fundamental: Yesterday, participants were provided further clarity around the Federal Reserve’s intent to hike interest rates and taper the pace of asset buying.

“At first blush, the December FOMC minutes read hawkish, and the market reaction supports this,” said Cliff Hodge, chief investment officer for Cornerstone Wealth.

“The fact that FOMC participants are discussing faster and more aggressive rate hikes, alongside a faster pace of balance sheet normalization than the last hiking, indicate that the Fed put for the stock market has been repriced lower.”

The news coincided with a fast move higher in Treasury yields and weakness in the growth- and innovation-heavy Nasdaq-100.

*Graphic: Via* *The Market Ear, JPMorgan Chase & Co analyzes sector and yield correlations.*

This is as higher rates have the potential to decrease the present value of future earnings making stocks, especially those that are high growth, less attractive.

Recall yesterday’s commentary touching on the implications of tight monetary frameworks and less liquidity, so to speak.

In short, easy monetary frameworks pushed participants out the risk curve.

As a result, removal of liquidity, in the face of increased exposure to risk across different assets, can result in “hedging and de-leveraging cascades that affect the stability of all markets,” as well put in one article I recently wrote.

“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,” is one way to put it, additionally.

Positioning: Wednesday’s session unwound some of the single-stock bullishness that fed into S&P 500, itself.

Recall that Monday saw the selling of upside (call) and downside (put) protection. Tuesday saw more of the former, and that promoted some of the reversion, for lack of better phrasing.

Heading into Wednesday, volatility continued compressing. This is all the while the counterparty to the aforementioned trade was taking on more exposure to positive delta.

Why? Well, with any price rise, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

Counterparties are to offset gamma by adding liquidity (as can be approximated with thickening of book depth, below) to the market (i.e., buy dips, sell rips).

Therefore, as stated, yesterday, the continued compression of volatility would serve to bolster any price rise as “hedging vanna and charm flows, and whatnot will push the markets higher.”

The tone changed, however. According to SpotGamma data (click here to learn more about access), customers sold upside (call) and bought downside (put) protection. The demand for puts accelerated after the release of FOMC minutes as can be seen via the chart, below.

*Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator suggested negative options delta trades in SPY likely had dealers selling into the close.*

That demand for protection coincided with an expansion in volatility; all else equal, higher implied volatility marks up options delta (exposure to direction).

*Graphic: SHIFT Search* *confirms* *SpotGamma data.*

With put buying, for instance, customers are indirectly taking liquidity and destabilizing the market as the market maker short the put will sell underlying to neutralize directional risk.

Higher implied volatility, higher delta, more selling. Hedging exacerbated weakness at the index and single-stock level, yesterday.

*Graphic: SqueezeMetrics* *details* *the implications of customer activity in the options market, on the underlying’s order book.*

Taking into account the aforementioned positioning, versus buying pressure (measured via short sales or liquidity provision on the market-making side), positioning metrics remain positively skewed, better than before.

*Graphic: Data SqueezeMetrics. Graph via Physik Invest.*

Though the dip lower and demand for protection may serve to prime the market for upside (when volatility starts to compress again and counterparties unwind hedges thus supporting any attempt higher), markets will tend toward instability so long as volatility is heightened and the market remains in short-gamma territory.

Technical: As of 6:30 AM ET, Thursday’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, just outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Scenario In Play: Spike’s mark 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).

Spike base is at $4,761.25. Above, bullish. Below, bearish.

In the best case, the S&P 500 trades higher; activity above the $4,691.25 micro composite point of control (MCPOC) puts in play the $4,717.25 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,732.50 high volume area (HVNode) and $4,756.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,691.25 MCPOC puts in play the $4,674.25 HVNode. Initiative trade beyond the latter could reach as low as the $4,647.25 HVNode and $4,623.00 point of control (POC), or lower.

Click here to load today’s 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.*

What People Are Saying

The Volume Weighted Average Price of $ARKK from its inception is ~110.40

That means the average long holder is down $24.22/ share =22%

Look at all the volume that was transacted above w Volume by Price 🤦‍♂️

Momentum remains lower and for the avg long, ARKK has been a failure pic.twitter.com/Zsq1TdThnB
— Brian Shannon, CMT (@alphatrends) January 6, 2022

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.

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.

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, mentorship, 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.

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

Disclaimer

Physik Invest does not carry the right to provide advice.

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.

Commentary

Daily Brief For January 4, 2022

Post author By Renato L. Capelj
Post date January 4, 2022
No Comments on Daily Brief For January 4, 2022

What Happened

Overnight, equity index futures auctioned higher alongside most commodities and volatility fell.

This is as investors await data on manufacturing and job openings/quits (10:00 AM ET).

*Graphic updated 6:30 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.* *Lea*rn 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

Fundamental: The aforementioned trade is happening in the context of a resurgence in the coronavirus, as well as the Federal Reserve’s intent to moderate stimulus, among other things.

“We expect 2022 to be far more challenging from an investment perspective,” Heather Wald, vice president at Bel Air Investment Advisors, said.

“Rarely has a market delivered three consecutive years of double-digit returns, as we have seen from 2019-2021. With the Federal Reserve set to accelerate tightening and a fairly valued stock market, we anticipate more muted returns for the S&P next year but still expect equities to remain attractive versus other liquid asset classes.”

Wald’s comments align with some metrics posted by LPL Financial’s Ryan Detrick.

“The bad news is when the S&P 500 gains more than 25% in a year, it has never gained more the following year,” Detrick said. “The good news? That next year can still be pretty darn good. Higher 85% of the time and up a solid 11% on average.”

*Graphic: S&P 500 returns via Ryan Detrick.*

This is as the S&P 500 sticks to its seasonal script; in the face of light positioning metrics, expected are massive inflows in the first few months of this year.

*Graphic:* *Per The Market Ear*, “January typically sees 134% of inflows (the rest of the 11 months -34%). And with every private wealth manager in the world right now pitching increased allocations into equities (out of cash and out of bonds), Goldman calculates that keeping 2021 pace, This would be $125BN worth of inflows quickly in January.”

This year is likely to be “dominated by continued knife-edge judgments by the Fed,” and inflation proving better than the most pessimistic forecasts, potentially.

The prospects of a rally into the first rate hike are emboldened. Thereafter, the market may decline through the rest of 2022.

Positioning: Interesting Twitter thread by Kris Sidial on the transfer of risk in different areas of the volatility term structure.

“You are seeing institutions aim to harvest the VRP in single stock land by hammering away at the front of the term structure. Especially the exotics desks that are notorious for carrying this inherent short calendar profile.”

What Sidial is talking about is most easily visualized by the compression and expansion of the VIX term structure in the graphic below. Notice the front move, relative to the back, below.

Graphic: VIX term shifts inward; as mostly short-dated protection is monetized or expired, volatility collapses and dealers’ exposure to the positive delta (via short puts) declines which meant they would cover their short futures hedges. This “vanna” flow bolsters SPX rallies.

The implications of this are staggering.

Participants, having been pushed out the risk curve, are using leverage to juice returns; option volumes are comparable to stock volumes.

As a result, related hedging flows represent an increased share of volume.

As I once wrote in a Benzinga article: “The reflexive response by the opposing side of options trades — a result of regulatory frameworks, the low-interest-rate environment, as well as growth of the derivatives complex — causes a cascading reaction that exacerbates underlying price movements.”

Sidial adds: “[T]his short gamma profile with more and more people using derivatives will make way for the rapid moves in shorter time frames.”

That explains a lot!

Moreover, if we zoom in more narrow, today, though implied volatility “is well above its pre-COVID level across the term structure,” it is being sold at the front end.

SpotGamma data confirms this. Via the graphic below, the compression of volatility coincides with call and put selling at the index level; note, though, the increased put selling (more bullish).

*Graphic: SpotGamma’s Hedging Impact of Real-Time Options (HIRO) indicator.*

Participants’ activity in shorter-dated tenors (as evidenced by the compression of VIX term structure mainly at the front-end) where options are more so sensitive to changes in the underlying price, time, and volatility, is promoting choppy (but bullish) price action, for now.

With bullish activity in single stocks like Tesla Inc (which was primed for an options-driven squeeze heading into Monday) feeding into S&P positioning, alongside the removal of hedges to positioning that was pressuring stocks and indices heading into Friday OPEX, and passive buying support, there’s potentially more room for higher, to put it simply.

*Graphic: SpotGamma* *posts* *on TSLA’s options positioning, Monday.*

In the end, the concern is whether this bullishness leaves participants reaching for downside (put) protection, later. This would have destabilizing implications, as Sidial alluded to earlier.

*Graphic: The “Biggest tail* *risk* *to SPX isn’t any macro data/virus/war but its own options market.”*

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 upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

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

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. 

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. 

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 higher; activity above the $4,798.50 low volume area (LVNode) puts in play the $4,805.50 extension. Initiative trade beyond the $4,805.50 could reach as high as the $4,814.00 and $4,832.25 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,798.50 LVNode puts in play the $4,790.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as low as the $4,777.00 untested point of control (VPOC) and $4,756.00 LVNode, or lower.

Click here to load today’s 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.

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.

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.

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.

Rates: Low rates have to potential to increase the present value of future earnings making stocks, especially those that are high growth, more attractive. To note, inflation and rates move inversely to each other. Low rates stimulate demand for loans (i.e., borrowing money is more attractive).

About

Disclaimer

At this time, Physik Invest does not carry the right to provide advice.

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.

Commentary

Daily Brief For December 29, 2021

Post author By Renato L. Capelj
Post date December 29, 2021
No Comments on Daily Brief For December 29, 2021

Notice: Given travel commitments, commentaries will be suspended until January 3, 2022.

As an aside, I’m sincerely honored to have you as a subscriber.

This newsletter began as a tool to hold myself accountable for objectively assessing dominant narratives and market-generated information.

Since launching, this commentary has grown. Content and engagement have improved.

Now, with many of the 200 or so of you that are reading this actively, I have spoken with via email, and the like, regarding trader development, among many other things.

When it comes to markets, at the end of the day, whether you’re at a bank (as some of you are) or at home, we’re all alone. The implications of this are staggering.

How are we to objectively assess and act on what the market is signaling to us with no framework or community to work off of?

That’s the problem and I hope to make a bigger impact, going forward.

Wishing you good health and success next year and beyond!

Best,

Renato

What Happened

In the face of a “stealth correction,” and an “off-loading of risk” by professionals, the S&P 500 remains strong further bolstered by options selling and volatility compression.

This is as less heavily-weighted constituents remain volatile; with hedging pressures sticky at the index level, the only reconciliation can be a decline in correlation.

As liquidity remains “holiday-thinned,” so to speak, coming into Friday’s weighty “Quarterlys” options expiration, positioning metrics suggest indices ought to stick at higher prices.

Thereafter, expect increased movement.

Moreover, ahead is data on trade in goods (8:30 AM ET) and pending home sales (10:00 AM ET).

*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

Given the persistence of responses to technical levels, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. Successful penetration often portends follow-through as the participants that were most active at those levels (quickly run for the exits when wrong).

Context: In the face of market internals that look weaker than at any time since March of last year, the S&P 500 remains strong, relative to its counterparts.

As alluded to in a prior section, the commitment of capital on lower volatility is upping the dealers’ addition of liquidity, which supports high prices but may limit further price discovery.

Why? When a position’s delta rises with stock or index price rises, gamma – the expected change in delta given movement in the underlying – is added to delta.

According to SpotGamma, “[a]s participants keep adding to their bets at $4,800.00, the dealer only takes on more exposure to positive gamma.”

*Graphic: Via SpotGamma. “Based on the fact that we are at the S&P Call Wall and are approaching this large OPEX, we look for a pause and some consolidation in markets here.”*

So, with liquidity “holiday-thinned,” so to speak, and participants’ concentration of activity in near-the-money options strikes, coming into this week’s “Quarterlys” options expiration, indices are to remain pinned.

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. pic.twitter.com/712OAMq7iP
— SqueezeMetrics (@SqueezeMetrics) April 11, 2021

After Friday, the market is more susceptible to fundamental forces as, according to SpotGamma, there will be “a decrease in sticky gamma hedging.”

Couple current options positioning and buying pressure – via short sales or liquidity provision on the market-making side – metrics suggest middling returns 1-month out, or so.

Moreover, the expectation is that positive fundamental forces and dealers’ covering of hedges to remaining “put-heavy” positioning bolster seasonally-aligned price rise in January.

In anticipation of higher prices, low cost, complex options structures like call-side calendars, butterflies, and ratio spreads are still top of mind.

After a fast move higher over the past week or so, with positioning metrics as they are, it does not make sense to commit massive debits to static or variable long-delta trades. Cost matters.

*Graphic: Via Banco Santander SA (NYSE: SAN)* *research, the return profile, at expiry, of a classic 1×2 (long 1, short 2 further away) ratio spread.*

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 middle part of a balanced overnight inventory, inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Spike Rules In Play: Spike’s mark 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 base is $4,776.00. Below bearish (change in tone). Above bullish (status quo).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,781.75 high volume area (HVNode) puts in play the $4,798.00 minimal excess. Initiative trade beyond the minimal excess could reach as high as the $4,805.50 and $4,815.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,781.75 HVNode puts in play the $4,770.50 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,732.50 HVNode and $4,717.25 low volume area (LVNode), or lower.

Click here to load today’s 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

https://twitter.com/AnalystDC/status/1475609809420537857?s=20

“SPX implied volatility is well above it’s pre-Covid level across the term structure”

(Median 50-delta SPX implied vol) pic.twitter.com/A45Ig3Obdb
— Rob Emrich III (@therobemrich) December 28, 2021

YEAR IN REVIEW 2021, my Bitcoin paper.
You must change position if what you see doesn't map to what you expected.
I liked the concept until I realized the digital currency w/o govt I had in mind did not pan out: it had mutated into an open-Ponzi sch.https://t.co/HWE66WFH6Z pic.twitter.com/SOPeOzRRBR
— Nassim Nicholas Taleb (@nntaleb) December 28, 2021

Options (gamma) walls 101- what is a gamma wall? Well it is a long options position above or below the market which puts a cap or a floor on the market. Let's use the current case. There is a wall at 4800 on the SPX that expires on Friday.
— Andy Constan (@dampedspring) December 28, 2021

There is a lot going on in the digital asset space but also nothing going on and that is the problem…

Let me give you some thoughts… 1/
— Raoul Pal (@RaoulGMI) December 28, 2021

Definitions

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, helping develop insights around impactful options market dynamics.

Disclaimer

At this time, Physik Invest does not carry the right to provide advice. 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.

Commentary

Daily Brief For December 27, 2021

Post author By Renato L. Capelj
Post date December 27, 2021
No Comments on Daily Brief For December 27, 2021

Notice: Up to January 3, 2022, any commentaries published will be lighthearted and, generally, shorter in length.

What Happened

Overnight, equity index and bond futures were divergent while most commodities traded lower.

In the face of “holiday-thinned liquidity,” the CBOE Volatility Index (INDEX: VIX) rose ~1.15; this week, the expectation is (A) flatlined volatility or (B) ugly, headline-driven intraday moves.

Ahead, there is no data scheduled for release.

*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

Last week, on lackluster intraday breadth and market liquidity metrics, the best case outcome occurred via an expansion of range and separation of value, the levels at which participants found it most favorable to transact.

The aforementioned activity, which marks the continuation of a trend, is built on poor structure.

That, ultimately, adds to technical instability.

Why? As explained, Thursday, given the persistence of mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery.

Via volume profile analysis, we see a plethora of low-volume pockets – voids, if you will – that likely hold virgin tests. As stated, yesterday, successful penetration portends follow-through given the participants that were most active at those technical levels. Caution is still warranted.

Graphic: Divergent delta (i.e., non-committed buying and 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 may offer favorable entry/exit; the market is attempting to balance).

Context: In the face of a “stealth correction,” and an “off-loading of risk by professional speculators,” the S&P 500 closed beyond a visual resistance level, last week, on light volume.

*Graphic: A multi-month divergence (and downtrend) in breadth metrics stabilize as participants attempt to discover higher prices in the S&P 500.*

This is as, according to Ryan Detrick of LPL Financial, the “official Santa Claus Rally starts this Monday (last 5 days of the year and the first two of the following year).”

Kai Volatility’s Cem Karsan echoes Detrick’s remarks.

“Since 1980, there have been 10 instances where the S&P 500 was up 20% or more going into the last stretch of trading, and in 9 of those years, it ended the final 6 days higher.”

Moreover, despite an eventual decline in fiscal support, negative adjustments to the EPS guidance of more index constituents, and revisions lower in growth forecasts, Morgan Stanley’s (NYSE: MS) saw flows shift in high-growth, rate-sensitive names – “flows have reversed in recent sessions as there have been small levels of net buying.”

The change in tone with respect to flows is seasonally-aligned, so to speak; per Goldman Sachs Group (NYSE: GS), January sees more inflows than all other months combined.

Adding, in the face of this week’s weighty “Quarterlys” expiry, Goldman Sachs sees options selling attractive, near term; a commitment of capital on lower volatility likely results in counterparties to customer options trades taking on more exposure to sticky positive gamma.

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

This is while many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Therefore, coming into weighty options expiration, correlations may be off (as that is the only reconciliation in an environment where, at the index level, hedging pressures are sticky, whereas elsewhere they aren’t).

Thereafter, participants ought to monitor the sides and levels capital is committed for clues as to where we go next.

Continued compression of volatility, as well as a commitment to options higher in prices and further out in time, supports upward price discovery.

Unpacked with @spotgamma recent trade through an options market lens.

Key Points:
– What is delta, long/short gamma, vanna, charm
– Implications of NOV, DEC expiry. Post-OPEX vol
– Where to next given current options positioning
– Expert comments + morehttps://t.co/ZUf97pYhtb
— Renato Leonard Capelj (@renatolcapelj) December 23, 2021

Expectations: As of 5:45 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 balanced 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 $4,717.25 low volume area (LVNode) puts in play the $4,732.50 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,743.00 regular trade high (RTH High) and $4,767.00 extension, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,717.25 LVNode puts in play the $4,690.25 micro composite point of control (MCPOC). Initiative trade beyond the MCPOC could reach as low as the $4,673.00 untested point of control (VPOC) and $4,647.25 HVNode, or lower.

Click here to load today’s 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.

What People Are Saying

https://twitter.com/LanceBeggs/status/1475089008849944578?s=20

Do not let anyone distract you from your goals. Do the work, be resourceful, iterate and keep trying.

I’m seeing several accts citing failure statistics and suggesting that retail ppl should just go passive and do something else with their time…
— Darrin (@darjohn25) December 25, 2021

"#Gambling, #investing & #trading, it's all exactly the same…"

Vol trader & renowned author, @SinclairEuan joins @JasonMutiny in the last segment of this week's Real Visionaries for a look at his wild journey from market making & sports betting to even card counting in #Vegas. pic.twitter.com/5l7Av6wXZa
— Real Vision (@RealVision) December 23, 2021

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Methodology

Theory Applied: Contextualizing Recent Market Volatility

Post author By Renato L. Capelj
Post date December 24, 2021
No Comments on Theory Applied: Contextualizing Recent Market Volatility

With SpotGamma, Physik Invest’s Renato Leonard Capelj unpacks recent market movements from an options positioning perspective.

Coverage includes the following:

Definition and application of first and second order options greeks.
Implications of the November and December options expirations.
How current positioning may dictate trade in Q1 2022 and beyond.
Expert commentary and much more!

Click below to learn more!

‘Call AAA’: Santa Claus Is Having Sleigh Troubles

Tags AMC - AMC Entertainment Holdings Inc, ARKK - ARK Innovation ETF, Call Wall - Magnet Or Resistance Level, Cem Karsan, Charm, CME - CME Group Inc, Delta, Divergent Breadth, FOMC - Federal Open Market Committee Event, Gamma, GS - Goldman Sachs Group Inc, JPM - JPMorgan Chase & Co, Kai Volatility, Kris Sidial, Long Gamma - Buy Dip & Sell Rip, Market Liquidity (Book Depth), MCO - Moody's Corporation, Newfound Research, OPEX, Options, Protective Collar (Long Equity + Short Call + Long Put Spread), Put Wall - Magnet Or Support Level, Quadruple Witching, Short Gamma - Sell Dip & Buy Rip, SpotGamma, SPX - Cash S&P 500 Index, SPY - SPDR S&P 500 Trust ETF, Supportive HIRO, The Ambrus Group, Vanna, VIX - CBOE Volatility Index, VIX Futures Term Structure

Commentary

Daily Brief For December 23, 2021

Post author By Renato L. Capelj
Post date December 23, 2021
No Comments on Daily Brief For December 23, 2021

What Happened

Led by the Russell 2000, overnight, equity index futures continued higher while commodities were mixed and bonds were a touch lower. Friday, December 24, markets are closed.

Pursuant to comments made earlier this week, volatility was sold aggressively; the CBOE Volatility Index (INDEX: VIX) dropped ~9.00. This coincides with a compression in the VIX’s term structure, and that has so-called bullish/supportive implications.

Ahead is data on jobless claims, personal income, consumer spending, inflation, disposable income, goods orders (8:30 AM ET), as well as new home sales, University of Michigan sentiment, and five-year inflation expectations (10:00 AM ET).

*Graphic updated 6:40 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 divergent market liquidity metrics, the best case outcome occurred, via the S&P 500’s spike close higher, away from intraday value, the levels at which participants found it most favorable to transact.

This activity, which marks the continuation of an earlier trend change, is built on poor structure.

That, ultimately, adds to technical instability.

Why? If you haven’t noticed, the levels quoted daily in this particular commentary seem to be holding to the tick. Given the persistence of mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) carry a heavier hand in recent price discovery.

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: According to Ryan Detrick of LPL Financial, the “official Santa Claus Rally starts this Monday (last 5 days of the year and the first two of the following year).”

The 7 days (after this Monday) are up nearly 79% of the time.

However, in the past 5 occurrences, “Jan was also in the red and Q1 been weak as well.”

*Graphic: LPL Financial on the so-called Santa Claus rally.*

This activity comes after last week’s weighty “quad-witching” and ahead of the December “Quarterlys” expiry.

The exposure that rolled (and is to roll) off was “put-heavy.”

Participants’ commitment to capital at strikes lower in price and out in time – in the face of weak breadth and bearish fundamental developments – in single stocks, fed into the indices, also.

According to SpotGamma, the December 17 expiration cleared quite a bit of negative delta (e.g., the ARK Innovation ETF [NYSE: ARKK] had $1.5 billion in notional put delta expire).

This opened a window of strength and realized volatility, wherein positive fundamental forces and dealers’ covering of hedges could bolster any recovery.

Its often positioning – particularly around OPEX that drives price.

Narratives are assigned later.https://t.co/ZtaelFm3NW
— SpotGamma (@spotgamma) December 22, 2021

So, it is this week’s collapse in implied volatility (and associated collapse in term structure), coupled with the pending management of large S&P positions, and relentless, seasonally-aligned “passive buying support,” which brought positive flows bolstering this “Santa Claus rally.”

*Graphic:* *Shift Search* *data suggests participants are likely initiating* *box spreads* *and rolling their call exposure out in time (as much as 6 months).*

Notwithstanding, as mentioned, yesterday, Goldman Sachs Group (NYSE: GS) saw “options selling strategies as attractive in the near term,” estimating “a 12% probability of a 1-month 5% down-move in the SPX in this economic environment based on [the] GS-EQMOVE model.”

“Options are pricing a 22% probability of that size move indicating that puts are overvalued.”

As noted Tuesday, the commitment of capital on lower volatility results in counterparties taking on more exposure to positive gamma. The growth in positive gamma (as the data is showing) will be offset through the dealers’ supply of liquidity, pressuring the price discovery process.

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

This is while many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Therefore, coming into weighty options expirations, correlations may be off (as that is the only reconciliation in an environment where, at the index level, hedging pressures are sticky, whereas elsewhere they aren’t).

Thereafter, participants ought to monitor the sides and levels capital is committed for clues as to where we go next. Continued compression of volatility, as well as a commitment to options higher in prices and further out in time, supports upward price discovery.

Graphic: Via The Market Ear, “There have been five prior years since 1953 (when we went to the 5-day trading week) that have seen December as the most volatile month: 1973, 1978, 1985, 1995, and 2018. The January following these five prior years was BIG positive four out of five times, with January 2019 seeing the biggest gain.”

Weakness (alongside a commitment to strikes lower in price and out in time) likely sets the market up for another round of instability, as realized in late November and early December.

*Graphic: A compression in the VIX term structure would provide markets with a boost.*

Expectations: As of 6:30 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, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Spike Rules In Play: Spike’s mark 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 base is $4,678.50. Below bearish (change in tone). Above bullish (status quo).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,690.75 micro composite point of control (MCPOC) puts in play the $4,709.00 untested point of control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,732.50 high volume area (HVNode) and $4,743.00 regular trade high (RTH High), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,690.25 MCPOC puts in play the $4,673.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,647.25 HVNode and $4,623.00 POC, or lower.

Click here to load today’s 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.

Definitions

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.

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level).

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Commentary

Daily Brief For December 22, 2021

Post author By Renato L. Capelj
Post date December 22, 2021
No Comments on Daily Brief For December 22, 2021

What Happened

Overnight, equity index futures were divergent while most commodity and bond products were sideways to higher. This is as traders position themselves for the less liquid holiday trade.

Ahead is data on gross domestic product and income (8:30 AM ET), consumer confidence, and existing home sales (10:00 AM ET).

What To Expect

On supportive intraday breadth and divergent market liquidity metrics, the best case outcome occurred; the S&P 500 auctioned away from intraday value, the levels at which participants found it most favorable to trade at.

Given the mechanical responses to key technical levels, visually-driven, weaker-handed participants (which seldom bear the wherewithal to defend retests) are very much in control.

Moreover, Tuesday’s activity, which was follow-through on Monday’s responsive buying, left low-volume structures in its wake.

Virgin tests of the low-volume – a void of sorts – ought to hold. Successful penetration portends follow-through given the participants that were most active at those levels.

Context: In light of elevated implied volatility and limited macro, and micro catalysts, Goldman Sachs Group (NYSE: GS) sees “options selling strategies as attractive in the near term.”

“We estimate there is a 12% probability of a 1-month 5% down-move in the SPX in this economic environment based on our GS-EQMOVE model. Options are pricing a 22% probability of that size move indicating that puts are overvalued.”

The commitment of capital on lower directional volatility results in counterparties taking on more exposure to positive gamma which they will offset by supplying the market with liquidity, thereby pressuring the price discovery process.

Note: As a position’s delta rises with stock or index price rises, gamma (or how an option’s delta is expected to change given a change in the underlying) is added to the delta.

“I use this analogy of a jet,” Kai Volatility’s Cem Karsan once explained to me, referencing the three factors – the change in the underlying price (gamma), implied volatility (vanna), and time (charm) – that are well known to impact an options exposure to directional risk or delta.

“As volatility is compressed, those jets will keep firing because … the hedging vanna and charm flows, and whatnot will push the markets higher.”

Still, many products are in lower liquidity and short-gamma (wherein an options delta decreases with stock prices rises and increases when stock prices drop) in which moves are more erratic.

Realized volatility of VIX futures
from GS via @zerohedge pic.twitter.com/lLXkzcSP5M
— SpotGamma (@spotgamma) December 22, 2021

If the S&P were to further trend sideways, as a result of the aforementioned hedging pressures, a decline in correlation – among volatile constituents – would be the only reconciliation.

A post-holiday collapse in implied volatility, coupled with the management of massive S&P positions, and relentless, seasonally-aligned “passive buying support,” may bring in positive flows that would bolster any attempt higher.

*Graphic: A compression in the VIX term structure would provide markets a boost.*

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 balanced overnight inventory, just outside of prior-range and -value, suggesting a potential for immediate directional opportunity.

Gap Scenarios In Play: 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 $4,623.00 point of control (POC) puts in play the $4,647.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as the $4,674.25 HVNode and $4,709.00 VPOC, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,623.00 POC puts in play the $4,585.00 VPOC. Initiative trade beyond the VPOC could reach as low as the $4,574.25 HVNode and $4,549.00 VPOC, or lower.

Click here to load today’s 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.

What People Are Saying

To me, this is really the most cautious sign in this environment.

Contrary to the news outlets, there has not been any real “fear” hitting the derivatives market. Yes there was a bid in vol, but we have been noticing a lot of orders on the tape opening to sell Vega. https://t.co/scRyKSSTTy
— Kris Sidial🇺🇸 (@Ksidiii) December 21, 2021

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Commentary

Daily Brief For December 7, 2021

Post author By Renato L. Capelj
Post date December 7, 2021
No Comments on Daily Brief For December 7, 2021

What Happened

Overnight, screens went green as equity index and commodity futures auctioned sideways to higher as fears regarding the Chinese economy and omicron were assuaged.

Specifically, China moved to ease monetary policy and studies revealed GSK’s antibody treatment working on the COVID-19 omicron variant.

Ahead is data on the trade deficit, productivity, and unit labor costs (8:30 AM ET), as well as consumer credit (3:00 PM ET).

Graphic updated 6:30 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 supportive intraday breadth and divergent market liquidity metrics, the best case outcome occurred, evidenced by an upside gap, expansion of range, and separation of value.

This activity, which marks participants’ willingness to change the trend, is on top of poor structure, a dynamic that adds to technical instability.

Specifically, Monday’s session left a gap and p-shaped emotional, multiple-distribution profile structure (i.e., old-money shorts covering).

Going forward, participants will look to revisit, repair, and strengthen – build out areas of high volume (HVNodes) via the cave-fill process – these areas of low volume (LVNodes).

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 suggested current prices offered favorable entry and exit).

Context: COVID-19, China, and U.S. growth, as well as improvements in positioning metrics.

Overnight, there was news that GlaxoSmithKline Plc’s research showed its antibody treatment effective against mutations in the omicron variant.

This came after China’s decision to reduce the cash banks must hold in reserves; the development releases “funds in long-term liquidity to bolster slowing economic growth.”

As noted yesterday, though there is a potential that the U.S. realizes the swiftest tightening in financial conditions since 2005, now, more than during the tech-and-telecom bubble, do rates and earnings growth support current valuations.

At the same time, DIX, which is derived from short sales (i.e., liquidity provision on the market-making side), pointed to “natural, passive buying support,” while negative gamma exposures (i.e., an environment characterized by options dealers hedging their exposure by selling into lows and buying into highs), as a result of increased demand for very short-dated downside protection, left the market prone to destabilizing volatility.

Graphic: Sensitivity in the VIX term structure, at the front end, suggests heightened activity in shorter-dated protection. As we’re starting to see, once that short-dated protection rolls off the table (and/or is monetized), counterparties/dealers will reverse and support the market, buying to close their existing stock/futures hedges.

Taken together, the distribution of forward S&P 500 returns was skewed positive, heading into Monday’s session.

Subsequent price action, after participants’ powerful responsive buying at the S&P 500’s 50-day simple moving average, which coincided with a large base of resting liquidity at $4,500.00, is follow-through on indices being positioned for a vicious rebound.

Graphic: “[N]atural, passive buying support,” coupled with strong put flows results in positive return distribution. Data via SqueezeMetrics. Graph via Physik Invest.

To tame our expectations, I end with a statement from Morgan Stanley (NYSE: MS) research:

“We reiterate our view that tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery. How much lower? We forecast S&P 500 forward P/Es to fall to 18x, or approximately 12% below current levels. Obviously, for the more expensive parts of the market, that decline will be larger.”

Expectations: As of 6:30 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, 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 $4,647.25 HVNode puts in play the $4,674.25 micro composite point of control (MCPOC).

Initiative trade beyond the MCPOC could reach as high as the $4,691.25 HVNode and $4,707.00 LVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,647.25 HVNode puts in play the $4,618.75 HVNode.

Initiative trade beyond the latter could reach as low as the $4,581.00 untested point of control (VPOC) and $4,551.75 LVNode, 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.

What People Are Saying

Quick tips :

1. Flies are gamma trades. You buy one,you’re betting that the gamma will be tame&the underlying will drift toward your short strike.

2. The wings you buy need to be cheap. So Flies are also skew trades. Sell the guts expensive,buy the wings cheap(relative). https://t.co/5CjWsB6Nri
— Darrin (@darjohn25) December 7, 2021

Definitions

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

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

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.

Tags 50-Day Simple Moving Average, COVID-19, Divergent Delta, DIX - Dark Pool Index, Earnings Season, Gap, GEX - Gamma Exposure, HVN - High Volume Node, Interest Rates, LVN - Low Volume Node, MCPOC - Micro Composite Point Of Control, MS - Morgan Stanley, P-Shape Profile (Potential Short Covering), PBOC - People's Bank of China, Poor Structure, Short Gamma - Sell Dip & Buy Rip, SqueezeMetrics, VPOC - Virgin Point Of Control

Commentary

Daily Brief For December 6, 2021

Post author By Renato L. Capelj
Post date December 6, 2021
No Comments on Daily Brief For December 6, 2021

What Happened

Overnight, equity index futures auctioned sideways to higher after Friday’s liquidation had the S&P 500 undercutting its 50-day simple moving average (SMA), a visual go/no-go level.

Strength shifted, again, to the Russell 2000 while the tech-heavy Nasdaq 100 was underwater. This comes as policymakers look to temper inflation with the tightening of monetary policy.

In regards to news, China’s central bank looked to boost liquidity for its slowing economy. It was also found that a new virus variant was not fueling a surge in hospitalizations; the U.S.’s adviser on the issue, Anthony Fauci, said there wasn’t “a great degree of severity to omicron.”

That didn’t stop the economists at Goldman Sachs Group Inc (NYSE: GS) from cutting their forecasts for U.S. GDP next year; the estimates were revised down on an expectation the omicron strain would drag growth.

Ahead are no important releases on fundamental data.

What To Expect

On weak intraday breadth and divergent market liquidity metrics, the worst outcome occurred; there was an expansion of range, to the downside, and participants spent the majority of the session building value at lower prices (i.e., levels at which 70% of that day’s volume occurred).

The lower bound of Friday’s range was $4,500.00 or so, at which the 50-day SMA corresponded with a large base of resting liquidity.

To note, the 50-day is visual level at which short-term, technically-driven participants were likely buying in response to probes below developing balance.

Successfully auctioning beneath the 50-day is a concern. Those short-term participants lack the wherewithal (both emotional and financial) to defend retests.

Continuation lower, in such a case, is likely.

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 Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

According to Bloomberg, “the Fed is seen responding to the inflation fears stalking businesses by leaning toward an older playbook of prioritizing the fight against price pressures — even if that risks weaker growth over the longer term.”

In line with the aforementioned, traders already started pricing in potential rate overshoots with the “December 2024 eurodollar yields [rising] above December 2025 contracts, a curve inversion that signals expectations the central bank may consider cutting rates in 2025.”

The result is that the U.S. may realize the swiftest tightening in financial conditions since 2005 if the Fed was to hike rates three times next year.

*Graphic: Via* *Bloomberg, trades price in a rapid increase in the real Fed rate.*

This development carries weight; now, more than during the tech-and-telecom bubble, low rates support current valuations.

*Graphic: Low rates support current valuations better than the ‘90s, according to* *Nasdaq*.

The reason being?

“Lower interest rates lead to future cashflow discounting less – leading to higher valuations. From another perspective, a company with a 5% profit margin is a much more attractive investment when long-term borrow costs are less than 2%, as they are now than when it costs 5%-7% to borrow money back in the ‘90s.”

The Fed’s intent to taper faster, and eventually hike rates, just as liquidity conditions have deteriorated, pushed “the orange dot [in the above graphic] toward the right during the year.”

Notwithstanding, “growth in earnings is so far stronger than the multiple compression caused by rising rates (blue line),” and that is helping support this year’s rally.

The intent to moderate stimulus is likely to serve as a headwind; there’s always a possibility of unanticipated policy adjustments, in the face of a resurgent COVID-19 digging further into the economy’s growth.

That’s partially why we saw Goldman Sachs cut their forecasts for GDP.

*Graphic: Via The Market Ear. Goldman Sachs* *cut* *its forecast for GDP.*

But, for every negative view, there is a positive (either by the same institution or a competitor).

We see JPMorgan Chase & Co (NYSE: JPM), among others, doubling down on their bullishness.

“We are calling for another year of positive earnings surprises, relative to current consensus estimates.”

Similarly, the market may shrug off omicron just as it did beta and delta.

*Graphic: Via The Market Ear, the market* *shrugs* *off COVID-19 variants with ease.*

And, despite the market’s trade in short-gamma (a “negative [gamma] implies the opposite [selling into lows, buying into highs], thus magnifying market volatility”) destabilizing demand for downside protection is concentrated in shorter-dated options.

*Graphic: A* *roll* *lower in the VIX term structure brings in supportive flows. Via The Market Ear.*

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation, economic growth, and improvements in global trade.

Such development plays into a thesis held by Moody’s Corporation (NYSE: MCO).

“The forecast is that the Dow Jones Industrial Average increases this quarter and peaks in early 2022. However, the rest of the contours of the forecast didn’t change. We expect the DJIA to steadily decline throughout 2022, but because it will now peak later than previously thought, the level of the DJIA will be higher at the end of next year and over the near-term forecast.”

Similarly, here are some views by Morgan Stanley (NYSE: MS), compiled by The Market Ear.

“The Morgan Stanley’s Global Risk Demand Index (GRDI) [fell] to a 10Y low reading of -4.2SD, last Friday (currently -3.SD). Historically, such a level has proved to be a solid buy signal over the next 3m. Other signs that investor sentiment has overshot to the downside include the VIX > 30, a steep put-call skew, and the AAII survey where 42% of respondents are bearish (90th percentile reading). Over the last decade, MSCI ACWI has risen 98% of the time over the next 3m post this signal and by an average of 10%.”

Expectations: As of 6:30 AM ET, Monday’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., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the developing 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 $4,523.00 untested point of control (VPOC) puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,574.25 high volume area (HVNode) and $4,590.00 balance area high (BAH), or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,523.00 VPOC puts in play the $4,492.25 regular trade low (RTH Low). Initiative trade beyond the RTH Low could reach as low as the $4,471.00 and $4,425.00 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.

What People Are Saying

The "Gamma Trap"

Dec SPX has 3.3mm puts which is the largest of any expiration.
The chunkiest of these puts are likely held by funds which will hold to 12/17 expiration.
The 4000 strike has the most put interest.

If the market goes under 4500, the gamma trap could set:
(1/n)
— SpotGamma (@spotgamma) December 4, 2021

The 10 day moving average of the combined put-call ratio has been a long time solid guide to human behavior in the markets. When everyone is bullish (.50 ish) markets top and pull back. When everyone is bearish (.70 ish) markets bottom and rally. Ending the week at .75 pic.twitter.com/MDUhUncrMW
— John F. Carter (@johnfcarter) December 3, 2021

Definitions

Liquidation Breaks: The profile shape suggests participants were “too” long and had poor location.

About

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

Commentary

Daily Brief For December 3, 2021

Post author By Renato L. Capelj
Post date December 3, 2021
No Comments on Daily Brief For December 3, 2021

What Happened

Overnight, equity index futures auctioned in-sync, within the confines of yesterday’s recovery.

This is as participants position themselves for Friday’s data dump that may shed light on how fast the Federal Reserve (Fed) intends to tighten monetary policy.

Ahead is data on nonfarm payrolls, the unemployment rate, and average hourly earnings (8:30 AM ET). Later is Fed-speak by James Bullard (9:15 AM ET), Markit services PMI (9:45 AM ET), as well as ISM services, factory orders, and core capital goods orders (10:00 AM ET).

*Graphic updated 6:45 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

In the face of strong intraday breadth, the best case outcome occurred, evidenced by the recovery of Wednesday’s value (i.e., the prices at which 70% of that day’s volume occurred).

This action negated the knee-jerk selling that coincided with COVID-19 variant news.

As a result, the S&P 500 is back inside of a short-term consolidation; participants had no interest in transacting the S&P 500 on prices advertised below the balance area.

Context: The Fed’s intent to moderate stimulus and uncertainty with regards to how a new COVID-19 variant will impact the global recovery.

In the face of it all, according to Bloomberg, “The market is again pricing June 2022 as the most likely timing for the first Fed rate hike, same as on Nov. 24. At various stages over the intervening days traders looked at July, or even as late as September.”

This is as an emerging trend from the Fed, confirmed by Chair Jerome Powell’s Congressional testimony – for weeks into this most recent equity – resulted in a re-pricing of bond market risk.

That fear – demand for protection in the bond market – failed to appear in the equity market.

Instead, there was an insatiable appetite for stocks, according to Bloomberg, with investors pouring more cash in 2021 than in the past 19 years, combined.

That appetite for risk fed into the activity of some high-flyers like Tesla Inc (NASDAQ: TSLA), and, more recently Apple Inc (NASDAQ: AAPL). At the same time, the broader market was weakening, evidenced by a decline in breadth.

With indices pinned, heading into the November monthly options expiration (OPEX), as a result of sticky and supportive hedging flows, correlations declined.

Think about it. If heavily weighted index constituents are higher and the indices are pinned, then something has to give!

After OPEX, the removal of certain hedging flows had the market succumb to fundamental forces. The addition of participants’ underexposure to downside put protection, according to SpotGamma, resulted in more rampant two-way volatility.

The reason being? The market quickly entered into an environment known as short-gamma.

“What the heck is that? Please explain to me like I’m ten.” Okay, hold my beer.

Basically, funds holding long equity, in the interest of lower volatility returns, hedge. The S&P 500 is a benchmark and one of the best places to hedge, given liquidity, and so on.

These participants will sell calls against their long equity exposure. The proceeds from that sale will be put toward downside protection. Long equity, short call, long put. Get it?

The counterparty to this dominant positioning is a buyer (seller) of upside (downside) protection, a carry trade (i.e., long delta).

This exposure is hedged, yes! However, this exposure will also decay, in time, all else equal.

Volatility will slide down its term structure (vanna) and time will pass (charm); “as volatility ebbs and time passes, the unwind of these hedges brings in positive flows that can lead to lengthy sprints.” – Cem Karsan of Kai Volatility.

Now, within a certain range, said counterparties are, long-gamma also. Gamma is basically “the rate of change of delta per 1-point move in the underlying,” according to SqueezeMetrics.

As volatility and time to expiration decline, the gamma of at-the-money options rises; “option market-makers will hedge their positions in a fashion that stifles volatility (buying into lows, selling into highs).”

There are times, also, when the market is in a short-gamma; a “negative [gamma] implies the opposite (selling into lows, buying into highs), thus magnifying market volatility.”

With participants underexposed to downside protection, post-OPEX demand kicked the market into short-gamma; the conditions worsened when much of the activity was concentrated in shorter-dated tenors where the sensitivity of options to direction is higher, as stated.

*Graphic: VIX term structure 11/25. Backwardation signaled an entry into an unstable environment with activity concentrated at the front-end of the curve.*

Once that short-dated protection rolls off the table (and/or is monetized), counterparties will quickly reverse and support the market, buying to close their existing stock/futures hedges.

*Graphic:* *SpotGamma’s* *Hedging Impact of Real-Time Options (HIRO) indicator on 12/2 shows positive options delta trades firing off, which likely had dealers buying stock/futures into the close.*

This flow is stabilizing and may play into a seasonally-aligned rally into Christmas as participants see defenses rolled out against the new COVID-19 variant, and the positive effects of pro-cyclical inflation and economic growth, improvements in global trade, and continuity at the Fed, among other dynamics, play out.

Heavy buy program action continues from the open. The Monitor also provides the symbols that are in these buy programs and we can see most of them are in non index component issues …few FATMAAN entries compared to thousands of individual equity symbols.
— HFTAlert (@HFTAlert) December 2, 2021

We see participants opportunistically buying the dip, already, via metrics like DIX that’s derived from liquidity provision on the market-making side.

*Graphic: Earnings are rising and helping support historic PE multiples, via* *Nasdaq*.

Notwithstanding, the market is still in short-gamma and unless participants began betting on the upside (i.e., committing increased capital to calls at strikes higher in price and out in time), and we cross over to long-gamma, volatility ought to remain.

To assuage fears, though, here is a quote from Goldman Sachs Group Inc (NYSE: GS):

“We find that the market has already priced in a significant downgrade in the growth outlook off the back of Omicron concerns. While we don’t believe that the most extreme downside scenarios are fully reflected in current market pricing, there are clearly still scenarios that could prove better than anticipated by the sharp shift in pricing in recent weeks, in our view”.

Expectations: As of 6:45 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, will likely open in the upper 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 $4,574.25 high volume area (HVNode) puts in play the $4,590.00 balance area high (BAH). Initiative trade beyond the BAH could reach as high as the $4,629.00 untested point of control (VPOC) and $4,647.25 HVNode, or higher.

In the worst case, the S&P 500 trades lower; activity below the $4,574.25 HVNode puts in play the $4,551.75 low volume area (LVNode). Initiative trade beyond the LVNode could reach as low as the $4,526.25 HVNode and $4,497.75 regular trade low (RTH Low), 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.

What People Are Saying

If the bond market is rigged by central bank QE purchases (as per mainstream financial media) and thus we cannot rely on its (inconvenient?) disinflationary signals, then how to explain other gigantic markets (EDF, USD) that corroborate bonds?https://t.co/fcSjDFLGmU pic.twitter.com/DIPqVb6vTg
— Jeffrey P. Snider (@JeffSnider_EDU) December 3, 2021

https://twitter.com/HelenTrailer/status/1466568005081468929?s=20

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.

Balance (Two-Timeframe Or Bracket): Rotational trade that denotes current prices offer favorable entry and exit. Balance-areas make it easy to spot a change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend).

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

About

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.