Market insight June 6, 2022

Market insight June 6, 2022

Analyzing the market and the market dynamics has been difficult today and to wrap my head around it. The recent employment report was stronger than anticipated. That leads to concerns that the Federal Reserve may become more interventionist soon. So let's start off.

Many stocks have performed poorly, except energy stocks are the only positive contributors.

The negative gamma position will likely continue to cause intraday volatility as dealers are forced to follow market movements.

That refers to the fact that the firm continues in a negative gamma position, which indicates that trading firms are hedging more than they would like. That is likely to result in intraday volatility, as dealers will be required to regularly alter their hedges to remain in sync with the market.
Estimated SPX500 Dealer Gamma Exposure - All expirations

As the market has pulled back, near-term SPX500 options expiring around $4,100 have become relevant. Large call option contract expirations generate price movement with negative gamma and substantial intraday volatility. As the market fell, call options were less relevant.

The outstanding call options become less important because they are less likely to be "in the money" (ITM) at expiration. That makes it harder for dealers to chase prices higher because they have less incentive to buy calls.

I expect SPX500 to range between $4100-$4200 this week (for now)

SPX500 Put/Call Gamma Levels By Strike -- All expirations


If the VIX falls to 24, the SPX500 will most likely test $4200 resistance. If the VIX falls to 24, the volatility will likely decrease, and we could see VIX "pinning" since we have VIX expirations next week.  

"Pinning" describes when an asset's price stays around a certain level near expiration due to the dealer flows and hedging flows involved. If the S&P falls below 4200, It doesn't have to mean that VIX will spike. We will most likely stay "pinned."

A lower VIX leads to lesser volatility, or "calm before the storm."

JP Morgan Option collar trade

However, it is challenging to forecast next week’s FOMC/OPEX outcomes.

If the market rallies into FOMC, it might mean put option expiry support is arriving sooner than planned, reducing post-FOMC rally support. If the market is sluggish before FOMC/OPEX, expiry might see a rebound.

SPX500 Put/Call Gamma Levels By Strike -- All expirations

Before June 15, it's crucial to observe the market to determine its direction. This week, $4100-$4200 is essential. Before month-end, watch for a test of 4300 (JP Morgan collar strike at $4285) or $4000 (huge OI).