Graphic updated 8:00 AM ET. Sentiment Neutral if expected /MES open is inside of the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
Keeping it brief for today. Enjoy your Friday. Be opportunistic and watch your risk.
Positioning
For days prior, top-line measures of implied volatility or IVOL like the Cboe Volatility Index (INDEX: VIX) fell, as did the Cboe VIX Volatility Index (INDEX: VVIX), the latter which is a way to gauge the expensiveness of IVOL or convexity. It was, in part, the resolution of a recent liquidity crisis that prompted this to happen. Under the hood, volatility skew told a different story; traders were hedging against tail outcomes.
Even so, this hedging and volatility skew behavior did little to boost the pricing of most spread structures above and below the market we analyzed. The non-stickiness of IVOL into this rally may have been detrimental to the more expensive call options structures, as we expected; hence, our consistent belief that structures should be kept at low- or no-cost.
The environment changed yesterday, however. Both top- and bottom-line measures of IVOL were sticky into equity market strength. This was observed via the pricing of spread structures (e.g., verticals and back- and ratio-spreads) structured above and below the market. The stickiness of volatility seemed to impact most the put side of the market. Some savvy traders may have been able to build spread structures below the market at a lesser cost potentially.
As an aside, some may have observed how well our levels have been working. For instance, as shown below (middle bottom), yesterday’s Daily Brief levels marked the session high and low for the Micro E-mini S&P 500 Index (FUTURE: /MES).
Graphic: Retrieved from TradingView.
Commentators online have rightly pointed out the build-up of short-dated options exposures near current market prices. In short, this activity, and its potential hedging, help promote mean-reversion and responsiveness at our volume profile-derived key levels, which often overlap with centers of significant options activity, as we see. Particularly after the quarterly options expiry (OpEx), this activity’s ability to contain markets will ease; markets will yield to fundamental strengths or weaknesses. Based on top-line measures of breadth and IVOL, “there isn’t much juice left to squeeze,” SpotGamma says. From an options positioning perspective, for volatility to reprice lower and solicit re-hedging that boosts the market, “we need a change in [the] volatility regime (i.e., soft landing, bank crisis resolved, etc.),” SpotGamma adds. The likelihood of that happening is low; some expect the Federal Reserve (Fed) to stick to its original message and continue to tighten and withdraw liquidity. So, blindly selling options (colloquially referred to as volatility) in this environment is dangerous.
Graphic: Retrieved from Bloomberg’s Joe Weisenthal.
Damped Spring’s Andy Constan overlays past and present inflation fights. What if?
Graphic: Retrieved from Andy Constan of Damped Spring Advisors.
Technical
As of 8:00 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 balanced overnight inventory, inside of the prior day’s range, suggesting a limited potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,087.75.
Key levels to the upside include $4,097.25, $4,108.75, and $4,121.25.
Key levels to the downside include $4,077.75, $4,062.25, and $4,049.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold, barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures (bottom middle).
About
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice; all content is for informational purposes, and derivatives carry a substantial risk of loss. Capelj and Physik Invest, non-professional advisors, will never solicit others for capital or collect fees and disbursements for their work.
Physik Invest’s Daily Brief is a free newsletter sent to thousands of subscribers daily. Intrigued about what moves markets and how that can impact your financial wellness? Subscribe below.
Graphic updated 7:00 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. Click here for the latest levels. /MES levels are derived from the profile graphic at the bottom of this letter. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
The newsletter format needs to evolve a bit. Feedback is welcomed! If you are looking for the link to the daily chart, see the caption below the graphic above. Take care!
Positioning
Fear of contagion prompted demands for protection. Measures of implied volatility or IVOL rose, and consequently, these demands for protection pressured markets.
Previously, this letter explained for protection to keep its value, there would have to be a shift higher in realized volatility or RVOL. Well, RVOL did not come back in a big way at the index level, as many expected.
Thus, the positive effects of the bank-related stimulation and traders’ pulling forward their timeline for easing were compounded by the unwinding of hedging strategies.
Graphic: Retrieved from Bloomberg via SpotGamma. “This drop in 5-day realized vol (orange) is pretty sharp, given it occurred from such a low relative level. ‘Can’t short it, don’t want to buy it.’ This vol decline comes as SPX put open interest was cleared with March OPEX, and big VIX call interest expired last week.”
Previously depressed products like the Nasdaq 100 or NDX, which are generally very sensitive to monetary tightening, have performed well.
Graphic: Retrieved from Callum Thomas’ Topdown Charts.
As we near month-end, there is a quarterly derivatives expiry. Above current S&P 500 or SPX levels is a significant concentration of soon-to-roll-off open interest held short by investors. This means the counterparties are dynamically hedging a call they own; they’re selling strength and buying weakness, albeit in a less and less meaningful way, as those options near this expiration and their probability of paying out (i.e., delta or exposure to direction) falls.
Some would allege that volatility compression and time decay would have solicited a more meaningful response from options counterparties at those strike prices above; the absence of downside follow-through had traders supplying previously demanded downside put protection and catalyzing a rally. However, there are not many things for the market to rally on, and so much time has passed that the charm effects (i.e., the impact of time passing on an options delta) have lessened dramatically, some explain.
Graphic: Retrieved from Bloomberg via Liz Young. “The Nasdaq’s Cumulative Advance-Decline line has parted ways with index direction in recent days. In other words, the index has rallied despite weak breadth (more stocks falling than rising), the two lines are likely to find their way back together somehow…”
Therefore, it’s probably likely that the market remains contained through month-end. After, movement may increase. This letter acknowledged RVOL might come back in a big way, particularly with the bank intervention doing more to thwart credit creation.
The caveat is that markets can trade spiritedly for far longer. There is a potential for the markets to move into a far “more combustible” position. With call skews far up meaningfully steep, still-present low- and zero-cost call structures this letter has talked about in the past remain attractive.
Graphic: Retrieved from Charles Schwab Corporation-owned (NYSE: SCHW) thinkorswim.
If the market falls apart, your costs are low, and losses are minimal. If markets move higher into that “more combustible” position, wherein “volatility is sticky into a rally,” you may monetize your call structures and roll some of those profits into bear put spreads (i.e., buy put and sell another at a lower strike).
The signs of a “more combustible situation” would likely show when “volatility is sticky into a rally,” explains Kai Volatility’s Cem Karsan. To gauge combustibility, look to the options market.
Remember, calls trade at a lower IVOL than puts. As the market trades higher, it slides to a lower IVOL, reflected by broad IVOL measures. If broad IVOL measures are sticky/bid, “that’s an easy way to say that fixed-strike volatility is coming up and, if that can happen for days, that can unpin volatility and create a situation where dealers themselves are no longer [own] a ton of volatility; they start thinning out on volatility themselves, and that creates a more combustible situation.”
To explain the “thinning out” part of the last paragraph, recall participants often opt to own equity and downside (put) protection financed, in part, with sales of upside (call) protection. More demand for calls will result in counterparties taking on more exposure against movement (i.e., negative gamma) hedged via purchases of the underlying. Once that exposure expires and/or decays, that dealer-based support will be withdrawn. If the assumption is that equity markets are expensive now, then, after another rally, there may be more room to fall, all else equal (a simplistic way to look at this), hence the increased precariousness and combustibility.
Graphic: Retrieved from Callum Thomas’ Topdown charts.
About
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice; all content is for informational purposes. Capelj and Physik Invest are non-professional advisors managing their own capital. They will never openly solicit others for capital or manage others’ capital to collect fees and disbursements.
Physik Invest’s Daily Brief is read free by thousands of subscribers. Join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 9:10 AM ET. Sentiment Risk-On if expected /MES open is above the prior day’s range. /MES levels are derived from the profile graphic at the bottom of this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. The lower the GEX, the more (expected) volatility. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility. UMBS prices via MND. Click here for the economic calendar.
Administrative
Sorry for the delay. Please read through the positioning section. Have a great Monday!
As always, if there are holes or unclear language. We will fix this in the next letters.
Fundamental
On 3/22, we mentioned news of Russia wanting to adopt the yuan for settlements.
Putin: We are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America. I am confident that these forms of settlement in yuan will develop between Russian partners and their counterparts in third countries. pic.twitter.com/Mnw1WfjW4Y
And, with that, publications covering these East alliances use some tough language. One Bloomberg article notes China and Russia “roll[ing] back US power and alliances … [to] create a multipolar world … [and] diminish the reach of democratic values, so autocratic forms of government are secure and even supreme.”
Let’s rewind a bit to understand why all the toughness and fear.
If the US dollar's global supremacy erodes, America will face a reckoning like none before.
Recall Chinese President Xi Jinping speaking with Saudi and GCC leaders. Here is our 1/4 summary takeaway:
Graphic: Retrieved from Physik Invest’s Daily Brief for January 4, 2023.
Essentially, those remarks confirm the East is hedging sanctions risk. Reliance on the West is falling, and this inevitably will present “non-linear shocks” (i.e., “inflation mess caused by geopolitics, resource nationalism, and BRICS”) monetary policymakers are not equipped to handle. So, are the markets at risk?
President Xi to President Putin:
“Change that hasn’t happened in 100 years is coming and we are driving this change together.”
This most recent meeting between China and Russia increases the risks of unwinding the “debt-fueled economy in the US,” FT’s Rana Foroohar confirms, as we wrote in the Daily Brief for 1/4. Further, this is a threat to “hidden leverage and opaqueness.” That means the markets are at risk. Let’s explain more.
With the encumbrance of commodities, among other initiatives, these nations’ weight in currency baskets may rise and keep “inflation from slowing.” If that happens, future rate expectations are off. Additionally, “the US dollar and Treasury securities will likely be dealing with issues they never had to deal with before: less demand, not more; more competition, not less,” we quoted Zoltan Pozsar (ex-Credit Suisse) saying on 1/5.
The markets most responsive to this are public, as we saw with 2022’s de-rate. In 2023 and beyond, added liquidation-type risks lie in the private markets. This will have knock-on effects.
The likes of The Ambrus Group’s Kris Sidial mentioned to your newsletter writer in a Benzinga interview that private market investors’ raising of cash to meet capital calls could prompt sales of their more liquid public market holdings. This is a major risk Sidial noted he was watching, in addition to some risks in the derivatives markets.
At the same time, Eric Basmajian believes the “banking crisis will cause a tightening of money and credit.” This will further solidify the “broader business cycle and corporate profit recession.”
Graphic: Retrieved from Bloomberg. Per John Authers, “the combination of deeply troubled banks and strong performance for the rest of the stock market cannot persist much longer.”
Positioning
Sidial’s well positioned to take advantage of the realization of these risks. In January, he explained that measures like the Cboe VIX Volatility Index (INDEX: VVIX) were low. This suggested, “we can get cheap exposure to convexity while a lot of people are worried.” In an update to Bloomberg, Sidial said The Ambrus Group’s tail-risk strategy (which Sidial has explained to us before) has performed well as the VIX index has risen, a sign of traders hedging concerns about “some contagion hitting and their portfolios being destroyed on that.”
“We have seen an increase in tail hedging,” added Chris Murphy of Susquehanna International Group. “We have continued to see call buying in the VIX since the bank turmoil began.” The caveat, though, is that realized volatility or RVOL, not just implied volatility or IVOL (i.e., that which is implied by traders’ supply and demand of options), must shift and stay higher for those options to maintain their values, which may be difficult according to Kai Volatility’s Cem Karsan.
Though Karsan thinks markets will likely see RVOL come back in a big way, he thinks policymakers’ intervention will be stimulative short-term as it reverses a lot of the quantitative tightening or QT (i.e., flow of capital out of capital markets). Stimulation will be compounded by the continued unwinding of hedging strategies in previously depressed products like the Nasdaq 100 (INDEX: NDX). What do we mean by this?
Recall that traders’ closure and/or monetization of put protection results in options counterparties buying back their short stock and/or futures hedges. Therefore, before any downside is realized, the market may trade into a far “more combustible” position.
Consequently, look for low- and zero-cost call structures (e.g., ratio spreads) to play the upside while opportunistically using higher prices and elevated volatility skew to put on bear put spreads (i.e., buy put and sell another put at a lower strike price) for cheaper prices.
Consider following and supporting us on social media:
As of 9:10 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of the prior day’s range, suggesting a potential for immediate directional opportunity.
The S&P 500 pivot for today is $4,026.75.
Key levels to the upside include $4,038.75, $4,049.75, and $4,062.25.
Key levels to the downside include $4,004.25, $3,994.25, and $3,980.75.
Disclaimer: Click here to load the updated key levels via the web-based TradingView platform. New links are produced daily. Quoted levels likely hold barring an exogenous development.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for some time, this will be identified by a low-volume area (LVNodes). The LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to the nearest HVNodes for more favorable entry or exit.
About
The author, Renato Leonard Capelj, spends the bulk of his time at Physik Invest, an entity through which he invests and publishes free daily analyses to thousands of subscribers. The analyses offer him and his subscribers a way to stay on the right side of the market.
You may view this letter’s content calendar at this link.
Disclaimer
Do not construe this newsletter as advice. All content is for informational purposes. Capelj and Physik Invest manage their own capital and will not solicit others for it.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:00 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 this letter. Click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) reflects the attractiveness of owning volatility.
Positioning
It’s a dynamic this letter has discussed before. Levels quoted in the bottom section of this letter have proved useful in recent trade, marking the bottom and top of rallies precisely. A factor to blame is short-term participation. Let’s explain this further.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
For instance, as SpotGamma said this morning, volumes at options strikes, very close to levels this letter quotes, are very large relative to the open interest changes. These volumes are large enough to add to the movement and result in responses to certain areas, but their impact is not long-lasting. In fact, some suggest the activity is part of “trading for risk positioning” and the impact “can net out” over a longer time horizon.
It is this letter writer’s opinion that the noise is easy to get swept into. Rather, we are interested in participating in the bigger strides, hence the trades we’ve quoted prior.
As your letter writer elaborated in a recent note for SpotGamma, following weakness heading into the January monthly options expiration (OpEx), the window was open for relief. A cross above big inflections like the 200-day simple moving average, a trigger for some to buy stocks, coupled with measures like the Cboe Volatility Index (INDEX: VIX) trending higher, partly the result of the fear of missing out and hedging in a lower liquidity environment, had us leaning optimistic.
Notwithstanding, with measures like the Cboe VIX Volatility (INDEX: VVIX) “at low levels and rebounding” implying “(1) traders are looking to hedge for cheap and (2) convexity remains a good place to be”, we had the interest to limit downside via call structures with long and short options. The short options help us harvest a bit of call skew and lower the cost of the spread, helping it retain “value better through time.”
In short, though “the marginal positivity of further IV compression likely does little to keep stocks on an upward trajectory”, SpotGamma explained, structures we explained recently may enable you to get on the right side of an SPX and VIX up environment (explained by SpotGamma), all the while limiting downside on the eventual turn.
If you’re averse to directional risk, consider trades like the Box Spreads we talked about many letters back, which are now gaining popularity.
Technical
As of 8:00 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Our S&P 500 pivot for today is $4,050.25.
Key levels to the upside include $4,061.75, $4,071.50, and $4,083.75.
Key levels to the downside include $4,028.75, $4,011.75, and $3,998.25.
Click here to load updated key levels into the web-based TradingView platform. 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.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: 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.
About
In short, Renato Leonard Capelj is an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:45 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. The CBOE VIX Volatility Index (INDEX: VVIX) measure reflects the total attractiveness of owning volatility.
Administrative
A quick letter today, apologies.
Given the large, post-CPI movement, the above dashboard may be out of date!
Separately, your letter writer will be heading to Davos, Switzerland during next week’s World Economic Forum. Let me know if you’ll be in town. Take care!
Fundamental
Today, market participants received data that appears in line with estimates.
Expected was a 6.5% rise year-over-year (YoY) and a 0.1% fall month-over-month (MoM). These numbers were +7.1% and +0.1% the release prior.
Mattering most is core inflation, which the Fed has more control over. The expectation was that core CPI rose 5.7% YoY and 0.3% MoM. In the release prior, these numbers were 6.0% and 0.2%, respectively.
Overall, the view that inflation is trending in the right direction is supported.
We often unpack the implications, but we will save that for a coming analysis.
Positioning
We saw meaningful outperformance in realized volatility (RVOL). This was, in part, a result of increased demand for short-dated exposures to movements (i.e., gamma), as well as a supply of farther-dated volatility (i.e., +gamma worked, +vega did not).
The trends, as your letter writer explained in recent write-ups, and in a Benzinga article, may eventually exhaust; measures like the VVIX, which is the volatility of the VIX or the volatility of the S&P 500’s volatility, are printing at levels seen in 2017.
According to Kai Volatility’s Cem Karsan, markets are in a transition period and what’s worked in 2022 may not work as well in 2023; trades are becoming crowded and S&P 500 volatility skews have hit a lower bound of sorts. That was echoed by The Ambrus Group’s Kris Sidial who said that “we can get cheap exposure to convexity while a lot of people are worried.”
Since the start of the year, the skew shifted meaningfully higher while the S&P 500 and VIX have moved higher in sync, as well. Some, like SpotGamma, have their own explanation (e.g., the fear of missing out on a move higher results in call buying that bids volatility), expressing that this may be a trend that persists through events like Thursday’s consumer price update.
This letter’s takeaway is as follows. Markets can experience more of the same. As history has shown, the right trade may turn out to be short volatility across longer time horizons, and long/own volatility across shorter time horizons, for longer (i.e., current trends promoting realized volatility outperformance may persist longer).
However, should current trends persist, the market is likely to become far less well-hedged, as Karsan said in the video. If a catalyst arises, there may be a repricing in volatility which traders would not want to be on the wrong side of. Notwithstanding, as Sidial says, “[if] you’re trading volatility, let there be an underlying catalyst for doing so.” Don’t just buy it because it is cheap, or sell it because it is expensive.
We’ll go through the charts and implications in far more detail over the coming sessions. Your letter writer is stretched for time this morning. Take care!
Technical
As of 7:30 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Our S&P 500 pivot for today is $3,988.25 HVNode.
Key levels to the upside include $4,000.25, $4,011.75, and $4,028.75.
Key levels to the downside include $3,979.75, $3,959.00, and $3,943.25.
Click here to load today’s key levels into the web-based TradingView platform. All levels are derived using the 65-minute timeframe. New links are produced, daily.
As a disclaimer, the S&P 500 could trade beyond the levels quoted in the letter. Therefore, you should load the above link on your browser for more relevant levels.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: 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: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
About
In short, an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 8:30 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. 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.
Positioning
Friends, please read the entire post.
In the Daily Brief for December 21, 2022, this letter dissected some of the positioning contexts responsible for fixed-strike and top-line implied volatility (IVOL) measures’ downward trajectory with the S&P 500. Since this detailed letter was published, IVOL has increased, albeit not by a massive amount so to speak. The moves lower, coupled with the volatility skew not blowing out, have enabled your letter writer to monetize structures entered into while on travel for a nice return. Let’s talk about it, further.
Heading into consumer price (i.e., inflation) updates, as well as updates from the Federal Reserve on their commitment to stemming inflation, traders sought to protect against (or bet on) movement thereby bidding measures of IVOL.
To quote The Ambrus Group’s Kris Sidial, the “entire term structure was jacked going into CPI and FOMC.” Additionally, “granted nothing out of left field,” Sidial added, it would be tough “for December and January vol[atility] to remain bid.”
Graphic: IVOL term structure retrieved from Tier1Alpha.com.
Accordingly, after the CPI and FOMC, market concerns ebbed and traders’ supply of the options they demanded, particularly at the front-end of the curve, pushed the term structure back to an upward-sloping so-called contango.
Graphic: IVOL term structure retrieved from Tier1Alpha.com.
As was detailed in the December 21 letter, this dynamic following the release of CPI and FOMC would do a lot to keep IVOL and equity movement contained. Knowing this, your letter writer’s trading partner alerted him while on a trip of skew presenting some nice, zero-cost trades that would expand should the market trade lower and IVOL remain contained (i.e., volatility skew not blowing out).
Upon analysis, entered was a simple +1 x -2 Put Ratio Spread (Trade Ticket: SOLD -1 1/2 BACKRATIO SPX 100 20 JAN 23 [AM] 3400/3150 PUT @.10) for a ~$10.00 credit before fees and commissions, a favorite of your letter writer’s.
Graphic: Filled orders on December 14, 2022.
The trades provided exposure to -Delta (direction) and +Gamma (movement).
Graphic: Position statement on December 14, 2022. Using portfolio margin to lower BP Effect.
As an aside, from the start the Vega (sensitivity to changes in IVOL) was negative but, this has a lot to do with how far out the spread is on the chain and, should there be movement as you’re about to see, enabling the put leg you own to start kicking in, so to speak, Vega ends up turning positive very quickly, all else equal.
The below graphic, taken on December 19, prior to much of the spread being monetized, shows a large -Delta, +Gamma, and +Vega (i.e., if the market moves lower or IVOL rises, the spread is to rise in value), much like it did when the market traded down into the beginning of this week and IVOL rose into the end of this week.
Graphic: Position statement on December 19, 2022. Using portfolio margin to lower BP Effect.
For one account, 50% of the initial trade was closed for $205-220.00 in credit per spread. After this closure, the remaining structure, in this one account, was turned into a +2 x -5 Ratio. Why? In short, the market was strengthening and the odds of a large move lower were, in short, low. To have downside exposure but be paid for the initial effort, the conversion from a +4 x -8 to a +2 x -5 resulted in an additional $8.10 credit, leaving your letter writer with a -Delta, +Gamma, and +Vega, still.
Graphic: Trade history on December 23, 2022.
In the days after, the market turned and traded lower, far more than expected. Notwithstanding, the remaining structures (both +1 x -2 and +2 x -5) performed well, though the 2×5’s Vegas briefly turned negative on the sharp selling yesterday, which, if it had remained like that, would have solicited action (i.e., repositioning, closure, or hedging via correlated instrument).
Graphic: Working orders on December 23, 2022.
At the end of the day, what’s important to your letter writer, here, is how the spread prices if the market moves to it today, all else (e.g., time, IVOL, etc) remains equal. If the spread prices at a better price to close at the money, that’s a quick check that says: “Hey, your bet on the market moving lower actually makes money if the market moves lower, all else equal.”
To explain further, look at the working orders above. At current S&P 500 levels, the +1 x -2 prices for $215.00 credit to close. The Delta is negative, as desired, and both the Gamma and Vega are positive. If the spread was at the money, it prices for nearly a $4,500.00 credit to close as shown below.
Graphic: Pricing an order on December 23, 2022.
So, what now? Well, the exposure is really light and much of the structure was monetized. From here, if the market moves lower that would likely be good for the remaining structures. Any costs to enter have been covered and, at this point, the trade is a free bet on the downside.
Obviously, there are pieces not included in this trade dissection, today, including how to properly manage your greek risk, as well as size the position at entry. These are the secret sauces, so to speak, that will either make or break you in the long run.
Should you want more write-ups like this, comment below. Your letter writer attempts to make these updates as informative and engaging as possible. It’s tough, at times, given the dullness of the material. Separately, trading is not as hard as it’s all made out to be. Sure, you need to have a good read on markets (e.g., skew), but, as your letter writer has learned over the many years he’s been engaging with markets, the theory is nothing like practice. No formula will help you price and enter the correct trade structure in a fast-moving meme stock with IVOL blowing out.
If all could be automated, there would be no market. Markets are the product of human emotion. Avoid acting on theory, blindly. Price different structures, like the ones this letter has detailed, and observe how the different parts of the trade interact with each other as the market moves, IVOL moves, time passes, interest rates change, and so on.
For instance, you could have owned puts early in the week and still lost money as the market moved lower. If you would have leveraged a short leg against your long leg, then you could have offset the decay, as your letter writer did above.
There’s no substitute for time in the seat (e.g., you could have observed the -Vega at the entry on the trade structure above and not entered, missing out on the trade’s expansion. Time in the seat taught your letter writer better).
Don’t construe this letter’s simplicity as naivety, also. In the end, what’s your exposure to movement? If your bet is on movement, will you make money if the market moves? If not, find another trade structure or sit out.
Anyways, happy holidays to you and your closest. It’s been quite the year and I have a lot to be thankful for and reflect on. See you next week, most likely (though your letter writer’s burn-out may result in new publications being delayed until the new year).
Technical
As of 8:20 AM ET, Friday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to 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.
Our S&P 500 pivot for today is $3,867.75.
Key levels to the upside include $3,879.25, $3,893.75, and $3,908.25.
Key levels to the downside include $3,833.00, $3,813.25, and $3,793.25.
Click here to load today’s key levels into the web-based TradingView platform. 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.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: 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: Denote areas where two-sided trade was most prevalent over numerous sessions. Participants will respond to future tests of value as they offer favorable entry and exit.
About
In short, an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by thousands of subscribers. You, too, can join this community to learn about the fundamental and technical drivers of markets.
Graphic updated 9:35 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. 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.
Positioning
Traders may have observed a unique market dynamic occurring in the past sessions.
In spite of a down S&P 500 (INDEX: SPX), fixed-strike and top-line implied volatility (IVOL) measures such as the Cboe Volatility Index (INDEX: VIX), are on a downward trajectory. Let’s unpack.
Heading into the December monthly options expiration (OPEX), traders were seeking to bet on and guard against large market movement. Traders’ demand for options, particularly those that are shorter-dated, bid IVOL markedly over the period running up to December OPEX.
Graphic: Retrieved from Bloomberg via Michael Kramer. “No reason for the Cboe Volatility Index (INDEX: VIX) to rise when OPEX every day allows precision hedging.”
In fact, based on the pricing of options, the “consensus was a large right tail move in stocks,” SpotGamma explained in a recent note. Just look at the prices of options expiring December 15. There was a big premium in ultra-short-dated S&P 500 call options (left) versus puts (right).
Graphic: Retrieved by Physik Invest via the thinkorswim platform.
The same can be viewed via low volatility skew, in part the result of traders’ decreased interest in owning downside protection (as there is less reason to hold downside protection if you have sold your long stock and/or you have monetized existing protection during the 2022 decline).
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).
Anyways, as a result, counterparties (i.e., those who supplied traders their positive exposure to movement) were left “short a massive amount of Gamma,” or negative exposure to movement, which often results in hedging that reduces market liquidity and fattens the tails of the potential distribution of returns (i.e., buying strength and selling weakness), Kai Volatility said in a letter; positioning boosted “crash risk” and the potential for “more melt-ups.”
A clear display of this was after the “CPI release on Tuesday … In a matter of hours, [the] market gapped up 4% [and] then gave it all back,” Kai Volatility said.
Graphic: Retrieved from Danny Kirsch of Piper Sandler Companies (NYSE: PIPR). S&P 500 (INDEX: SPX) January $4,100.00 call volatility down, while the market is up big, offsets rally.
To further explain, that is because short-dated options gain and lose value quickly given their increased sensitivity to changes in market movement (Gamma), as time passes. When the S&P 500 moved higher after CPI, call options gained a lot of value (Delta) very quickly. Those on the other side of that trade (i.e., counterparts), who had exposure to -Gamma or negative exposure to movement, went from having, for sake of brevity, very little -Delta to a lot of -Delta. Therefore, counterparts bought stock and futures (added +Delta) to hedge against an imbalance bolstering rapid up-market movement. When the short-dated exposure rolled off, these options risks were no longer there. Counterparts removed the +Delta they added (sold stock and futures back to the market) resulting in a move back down to where markets had started.
Moving on.
Following the events of last week, the absence of the unexpected (i.e., what traders sought to hedge and/or bet on), resulted in options selling (supply of protection), a pressure on options prices that remained through December’s large monthly OPEX.
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS) via Bloomberg. OPEX removed open interest that was demanded at higher levels of IVOL and skew over the past three years, per Kai Volatility’s Cem Karsan. The associated compression of IVOL (Vanna flow) and the passage of time (Charm flow) you would expect to see this December period (i.e., bullish seasonality), coupled with a dash-for-cash and tax-loss selling seen following the calendar flip, was front-run creating the context for this market down, IVOL down environment.
These pressures are expected to last through January 10, as it’s easy to sell high IVOL likely to expire worthless (knowing there are good odds that nothing happens through the holidays), and own IVOL on the back of that period which is cheap.
Graphic: Retrieved from Danny Kirsch of Piper Sandler Companies (NYSE: PIPR). S&P 500 (INDEX: SPX) January $3,800.00 put volatility down while the market is down.
As Karsan puts it, “you’ll have some moments of minor excitement but no crazy tails,” until the week of January 10 when we are more likely to “see a countertrend rally.”
Following this period, as far out as May, there is a seasonal effect in the volatility space that could set the stage for a sharp leg lower. More on this later.
Technical
As of 9:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Our S&P 500 pivot for today is $3,867.75.
Key levels to the upside include $3,893.75, $3,909.25, and $3,926.50.
Key levels to the downside include $3,851.00, $3,838.25, and $3,813.25.
Click here to load today’s key levels into the web-based TradingView platform. 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.
Definitions
Volume Areas: Markets will build on areas of high-volume (HVNodes). Should the market trend for long periods of time, it will be identified by low-volume areas (LVNodes). LVNodes denote directional conviction and ought to offer support on any test.
If participants auction and find acceptance in an area of a prior LVNode, then future discovery ought to be volatile and quick as participants look to HVNodes for favorable entry or exit.
POCs: 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.
About
In short, an economics graduate working in finance and journalism.
Capelj spends most of his time as the founder of Physik Invest through which he invests and publishes daily analyses to subscribers, some of whom represent well-known institutions.
Separately, Capelj is an equity options analyst at SpotGamma and an accredited journalist interviewing global leaders in business, government, and finance.
Physik Invest’s Daily Brief is read by over 1,200 people. To join this community and learn about the fundamental and technical drivers of markets, subscribe below.
Graphic updated 6:50 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. 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.
Positioning
Aksel Kibar of Tech Charts said it well: There are two types of trades.
“1) Trades that you take moving from low volatility to high volatility [and] 2) trades that you take in high volatility while moving to low volatility.”
Like Kibar, we aim to be well-positioned for a move from low to high volatility. In short, that is where we are today. After an expansion of range to the upside, markets are trading sideways, in a tight range, and traders’ recent activities are likely to keep the status quo intact a bit longer.
Notwithstanding, we are likely nearing an expansion of realized volatility (RVOL), per the implied volatility (IVOL) bid; on Monday, some IVOL measures, such as the Cboe Volatility Index (INDEX: VIX), shifted up, as did term structure. Markets sold a bit, too.
Quick aside:
Changes in IVOL are a byproduct of supply and demand (i.e., demand rushes in → IVOL rises → option prices adjust higher).
When protection is demanded by investors, counterparties may pressure markets (a naive take, if we will, for the purpose of breaking things down).
To explain further, say the market is in balance and trading sideways, and traders seek to protect against potential downside movement by purchasing put options.
This new demand will bid put options prices, causing counterparties to hedge in a manner that pressures the market (i.e., a trader buys put and bids IVOL → the counterparty sells that put and futures to hedge that put), as we’re seeing (i.e., IVOL higher and market lower ahead of updates to measures like the Personal Consumption Expenditures [INDEX: PCE], the Fed’s go-to inflation reading).
Back to the letter:
Upon some new information, participants will enter and reprice the market.
Counterparties’ re-hedging could add to the movement up or down (e.g., traders sell their put hedges → IVOL compresses → counterparties buy back futures hedges and support the market).
If you’re betting on lower prices, recommended is a quick reference of Physik Invest’s Daily Brief for November 28, 2022. In short, according to SpotGamma, “there’s less to be lost owning protection down below,” given the performance of skew, relative to topline measures such as the Cboe Volatility Index (INDEX: VIX).
“On the contrary, if you buy [protection] and nothing happens, that [protection] may very well hold its value better than in the past.”
Graphic: Retrieved from TradingView. Top, S&P 500 (INDEX: SPX). Middle Nations SkewDex (INDEX: SDEX). Bottom Cboe Volatility Index (INDEX: VIX). According to one paper from Nations Indexes, “SkewDex tells market participants how expensive out-of-the-money options are in relation to at-the-money options and thus, how risk-averse investors are.”
On the call side, the story is similar; selling volatility blindly is not a good trade.
To explain, incentive schemes drove “people to be much more willing to pay and chase upside,” and this is, in part, evidenced by historically low skew. There is also stock replacement, among other things, due to the opportunity cost of buying stock being higher in the current interest rate environment (i.e., “higher call options premium when interest rates are high is the ‘opportunity cost’ of forgone interest”).
Graphic: Retrieved from Charles Schwab Corporation (NYSE: SCHW).
In the interest of brevity, this environment has resulted in a smile-shaped volatility skew pattern, rather than the typical smirk-shaped reverse volatility skew pattern.
Graphic: Retrieved from Interactive Brokers (NASDAQ: IBKR). Nasdaq 100 (INDEX: NDX) volatility skew resembles the so-called smile.
Skew has steepened on the call side – a result of traders positioning for an upside move – and we can use the richness of out-of-the-money calls to reduce the cost of our bets on the market upside.
Graphic: Retrieved from the Charles Schwab Corporation-owned (NYSE: SCHW) thinkorswim platform. Nasdaq 100 options prices.
For instance, low-cost 500-1000 points wide call ratio spreads (buy the closer leg, sell two of the farther legs) expiring in fifteen days may work well.
Graphic: Via Banco Santander SA (NYSE: SAN) research. The return profile, at expiry, of a 1×2 (long 1, short 2 further away) ratio spread.
A concern with these strategies is the width and time to expiry. Should either of those be wrong, then spreads initially positive gamma turn negative, meaning upside market movement hurts the position and losses are amplified.
Technical
As of 6:45 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to 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.
Our S&P 500 pivot for today is $4,997.00.
Key levels to the upside include $4,024.00, $4,051.00, and $4,069.25.
Key levels to the downside include $3,965.25, $3,923.00, and $3,909.25.
Click here to load today’s key levels into the web-based TradingView platform. 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.
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 also writes options market analyses at SpotGamma and is a Benzinga journalist.
Physik Invest’s Daily Brief is read by over 1,200 people. To join this community and learn about the fundamental and technical drivers of markets, subscribe below.
Graphic updated 6:50 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. 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.
Administrative
Hope you had a great holiday with your closest!
Fundamental
Minutes from a Federal Open Market Committee (FOMC) meeting dropped last week.
As strategist Rishi Mishra summarized well, “the focus shift[ed] to the terminal rate from the pace of tightening; although the terminal rate would be higher than previously expected, the pace at which we get there will be slower because they want to take lags into account.”
At its core, the economy has not slowed as much as the Fed was expecting, said Ellen Meade, a former Fed Board economist; “[t]hey can’t stop the rate increases until they see some measured evidence that the economy is slowing.”
So, with inflation “still at its highest since the 1980s,” according to Fabian Wintersberger, all the while financial conditions have loosened on easing inflation pressures, markets have yet to face their “most significant problems, [and] … keeping interest rates around 5% will not be a Fed pivot” (which is likely to happen near the middle of 2023, per the consensus analysis).
To bring the “balance sheet back to [2020 levels], [the Fed] needs to reduce it by 41%.” The balance sheet has only been reduced by 1.5%. Should liquidity keep shrinking, that pulls investors out of risk.
Graphic: Via Physik Invest. Data compiled by @jkonopas623. Fed Balance Sheet data, here. Treasury General Account Data, here. Reverse Repo data, here. NL = BS – TGA – RRP.
Positioning
From a volatility perspective, it’s not a terrible time to hedge.
An example demonstrates the point, well. As lightly discussed in last week’s letters, in mid-June, a trading partner and I noticed a change in tone in the non-linearity of volatility and skew with respect to linear changes in the price of the market or S&P 500 (INDEX: SPX).
The cost of certain spread structures (e.g., long/short one option near- or at-the-money and short/long two or more further out-of-the-money options) changed by hundreds of percent for only a few basis points of change in the underlying’s price.
Here’s more detail:
The market rose (boosted by a “vol crunch” and “systemic exposure reallocation,” per Nomura Holdings Inc’s [NYSE: NMR] Charlie McElligott) and, though top-line measures of IVOL have declined (e.g., INDEX: VIX), volatility skew is performing well.
Graphic: Retrieved from TradingView. Top, S&P 500 (INDEX: SPX). Middle Nations SkewDex (INDEX: SDEX). Bottom Cboe Volatility Index (INDEX: VIX). According to one paper from Nations Indexes, “SkewDex tells market participants how expensive out-of-the-money options are in relation to at-the-money options and thus, how risk-averse investors are.”
As Kai Volatility’s Cem Karsan once explained, this suggests “a potentially critical change in dealer positioning [and] the distribution of underlying outcomes”.
IVOL is at a lower bound and the bullish impacts yielded by its compressing have, largely, played out.
There is more to be gained by movement higher in IVOL. By owning protection, particularly that which is farther from current prices, you are positioned to monetize on non-linear repricings of volatility (as we saw earlier this year and may still see).
Graphic: Retrieved from Nomura Holdings Inc (NYSE: NMR).
Technical
As of 6:45 AM ET, Monday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the lower part of a negatively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Our S&P 500 pivot for today is $4,000.25.
Key levels to the upside include $4,024.00, $4,051.00, and $4,069.25.
Key levels to the downside include $3,985.00, $3,965.25, and $3,923.00.
Click here to load today’s key levels into the web-based TradingView platform. 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.
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.
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 also writes options market analyses at SpotGamma and is a Benzinga journalist.
Physik Invest’s Daily Brief is read by over 1,200 people. To join this community and learn about the fundamental and technical drivers of markets, subscribe below.
Graphic updated 9:00 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 this letter. Levels may have changed since initially quoted; click here for the latest levels. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) with the latter calculated 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. Click to learn the implications of volatility, direction, and moneyness. 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.
Fundamental
S&P Global Inc (NYSE: SPGI) put it really well in a recent update comparing today to the events of the mid-to-late 1630s. Dutch tulip bulbs traded as high as $750,000 per bulb (today’s money) before collapsing to near-zero.
That’s akin to what happened with the non-fungible token (NFT) craze of the late 2010s and early 2020s. Pictures of rocks sold for millions as recently as last year. Those pictures are worthless, now, and this has done a bit to dent the ecosystem’s apparent value, as well.
Graphic: Retrieved from Bank of America Corporation (NYSE: BAC) via @LanceRoberts.
What’s going on to cause this:
It’s basically the case that easy money policies enabled market participants to borrow and fund longer-duration bets on ideas with (potential) promise in the future.
Financial asset investments, too, were far more attractive, and that’s why we saw the asset inflation accelerate, followed by goods and services inflation that was bolstered by chokepoints and trends (e.g., deglobalization via supply chain security and geopolitics) and, ultimately, prompted policymakers to pivot.
i always used to assume the large sophisticated crypto firms were mostly focused on the high risk-adjusted-return relative value arb opportunities in the space: cross exchange arb, cash-futures basis; etc
FTX (CRYPTO: FTT) is among the victims of this pivot. It’s apparent that the events surrounding the collapse of crypto ecosystems months back prompted a so-called “credit crunch,” an insider close to FTX’s leadership explained.
“Many loaners suddenly recalled all of their loans just to see who was still liquid. Alameda lost a lot from giving out loans to firms [that] defaulted. Alameda was now, also, on the hook for money they didn’t have since they had given a lot of the loan money to FTX or had lost it loaning to now bankrupt counterparties. [Founder and CEO Sam Bankman-Fried] had two choices at this point, let Alameda get liquidated or send user money from FTX to ensure Alameda’s survival.”
Apart from “strong governance and transparency [to] grow in importance as the cryptocurrency industry attempts to reassure investors and customers, … regulation of cryptocurrency markets, which was already a matter of serious debate, could accelerate,” SPGI explained, noting that some “other areas of the decentralized finance [or DeFi] market may be affected. And lastly, these contagion effects are unlikely to ripple into traditional finance [or TradFi].”
Check out Reuters (FTX bankruptcy filings in, French central bank wants quick regulation) and The Information (Startups should prepare for ‘second order fallout’ from FTX collapse).
Simplify Asset Management’s Michael W. Green (who we quoted in the past for his perspective and belief that we are in “a dot-com type collapse” that’s happened “underneath the surface of the indices which is [a result of] … passive flows supporting the largest stocks within the index, whereas the smaller stocks can be influenced to a greater extent by [] discretionary managers”) said a likely result is a Central Bank Digital Currency (CBDC) and an “almost certain … change in the monetary system,” echoing what Kai Volatility’s Cem Karsan said a long-time ago: “I don’t see … a clear window where cryptocurrency is not subject to constraints and I think it’s highly likely that we move towards a digital dollar.”
CBDCs are highly controversial per my chats with the likes of Edge & Node’s Tegan Kline. She said they could “be used as a mass surveillance tool. Leaders have done little to invalidate her beliefs given their recent discussions on, for example, using CBDCs to derive “carbon footprint.”
That means having a read on where people are “traveling, how are they traveling, what are they eating, what are they consuming … This is something we’re working on,” leaders have put forth.
The point of this all is as follows:
As many may know, “there’s no ultimate buyer” in spaces like crypto and DeFi, as ex-Goldman Sachs Group Inc (NYSE: GS) emerging market FX and yield trader Seraphim Czecker, who is now heading risk and product management at Euler Labs, said.
It’s that and the persistent interest in illiquid products that leave the door open to manipulation. Barring illiquidity, “if there’s a 10 or 15 standard deviation move, the liquidity will allow for … you [to] offload those assets quickly.”
However, that’s not the widespread case.
“For example, look at what happened in the UK with the pension funds and margin calls. That is a classic DeFi strategy. You take your bonds and borrow cash against them. Then, you put it back into bonds and loop it a couple of times. That way, you have a leveraged interest rate exposure. That’s the same principle of lending staked Ethereum (CRYPTO: ETH), borrowing ETH, and doing it a couple of times.”
So, there may be “second order fallout” amid all this tightening. Markets, everywhere, are to de-rate. Ultimately, there’s probably a pivot to happen, in the future, with many leaders and strategists in finance unable to agree whether that (pivot) is the result of a recession.
Ukraine central bank says it is preparing banking system for blackouts. It is also suddenly clear that Ukraine might have had $ in FTX. They had partnered w FTX on donations. https://t.co/oZSOchz8bI + https://t.co/sDpXGNGuNn
“To take the foot off the brake right now and not finish the job, I think it’s the absolute worst mistake that the Fed could possibly make,” Citadel’s Ken Griffin said at the Bloomberg New Economy Forum in Singapore. In spite of Citadel seeing a recession averted, Griffin said: “I am finding it a bit hard to believe we are not going to have a recessionat that point of time, sometime in the middle to back half of 2023,” adding this year finishes with “modest growth.”
Those in agreement include Stanley Druckenmiller, who once managed George Soros’ funds. “You don’t even need to talk about Black Swans to be worried here. To me, the risk-reward of owning assets doesn’t make a lot of sense,” Druckenmiller said.
“When you make a mistake, you got to admit you’re wrong and move on that nine or 10 months, that [policymakers] just sat there and bought $120 billion in bonds,” he added. The “repercussions of that are going to be with us for a long, long time.”
Positioning
From a positioning perspective, much of what we’ve discussed in past notes is still true. Among others, Goldman Sachs Group Inc calculates up to $40 billion in buying over the next weeks with more than $80 billion of buying in an up market.
Graphic: Retrieved from @LanceRoberts. “Goldman calculates a whopping $38 billion to buy over the next week and substantially more (green line) if the market is up big. The chart below shows that the bank expects more than +$79 billion of net buying over the month.”
This is pursuant to our statements on the compression of implied volatility (evidenced by a shift lower in the term structure, particularly at the front end where options are most sensitive) compounding macro-type repositioning, with follow-on support coming from the reach for “Deltas and leverage” to the upside (call options).
Graphic: Retrieved from Goldman Sachs Group Inc (NYSE: GS).
As Alfonso Peccatiello of The Macro Compass puts it well: “incentive schemes drive people to be much more willing to pay and chase upside.”
Preferred are “convex structures” that would benefit from rallies.
However, in traders’ monetization of put protection they owned, as well as reach for upside calls (to not miss out on a potential reversal), skew is at its lows.
Graphic: Retrieved from The Ambrus Group’s Kris Sidial. “2017 is a year that is notorious for extremely low implied and realized vol. It is fascinating to see how insanely low the call-side volatility has been this year. There is low vol and then there is, in the gutter low vol.”
If the assumption is that “further tightening monetary policy and draining liquidity off the market might cause some problems down the road,” per Fabian Wintersberger, downside convexity (bets that trade non-linearly to changes in underlying price and volatility) are attractive.
Graphic: Retrieved from Banco Santander SA (NYSE: SAN).
Trades that may be attractive include collars, as well explained in a recent thread by IPS Strategic Capital’s Pat Hennessy.
“[T]he combination of historically flat skew [and] the highest rates we’ve seen in 15 years makes longer dated collars an attractive trade for those who are worried about the performance of stocks over the next year but do not want to sell or try timing the market.”
Technical
As of 9:00 AM ET, Tuesday’s regular session (9:30 AM – 4:00 PM ET), in the S&P 500, is likely to open in the upper part of a positively skewed overnight inventory, outside of prior-range and -value, suggesting a potential for immediate directional opportunity.
Our S&P 500 pivot for today is $4,000.25.
Key levels to the upside include $4,069.25, $4,136.75, and $4,231.00.
Key levels to the downside include $3,965.25, $3,913.00, and $3,871.25.
Click here to load today’s key levels into the web-based TradingView platform. 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.
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.
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 also develops insights around impactful options market dynamics at SpotGamma and is a Benzinga journalist.
