S&P's 'Line In The Sand': It's A Good Time To Buy Puts

S&P’s ‘Line In The Sand’: It’s A Good Time To Buy Puts

The S&P 500 is holding on to overnight gains for now, remaining above the key 4,000 level for now…

As SpotGamma details in a note this morning, resistance is in the 4100 – 4115 area with support shows at 4065 (Vol Trigger) then the 4015 – 4000 area.

Once again we saw a pickup in call positioning at strikes overhead. This is not something we’ve seen in some time, and as those calls fill in (and/or SPX rises) our volatility estimate should reduce, too. We consider this a bullish signal overall, we are a bit concerned this is a false breakout spurred by that lack of liquidity.

The key thing to note here is that if markets break below 4000 we expect price velocity to increase due to an increase in negative gamma and a shift higher in IV. However, if we break higher we look for volatility to reduce, particularly if we test >=4200. This is because IV will decline further which burns up put values (vanna is a strong force here, but not as strong +3-4% in SPX).

Ironically, SpotGamma points out that as markets threaten to breakout to the upside (amid worser-er and worser-er macro news),  its arguably the best time in a while to buy puts.

We’ve noted some very bullish readings in that metric lately (-0.05) which are usually only seen in call-heavy markets. Obviously this is/was a market dominated by puts, which made the “high” RR reading likely due to heavy put supply – after all the measure shows how put prices are relative to calls. We now see the metric slipping a bit lower (-0.07) which may signal that there is a bit of incremental put demand.

The bottom line from SpotGamma: A close >=4100 likely signals a continuation of the rally into next week, and we highlight that 4300 area as our max upside line into June FOMC/OPEX (6/15). A close down <=4000 suggests continued weakness for next week, with 3700 our major low into June OPEX.

Tyler Durden
Fri, 05/27/2022 – 09:45

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