Good Morning,
- Dealers have pushed back into more favorable positioning, just shy of our gamma flipping point.
- As we've previously highlighted, the 5200 strike is likely the more critical level than the GEX flip at 5217, just based on the amount of open interest tied to that strike. In fact, on our total gamma by strike model, the 5200 strike actually shows quite a bit of positive gamma, which reinforces that this is the level to watch.
- That said, this positioning still presents a highly dynamic and path-dependent setup
- If SPX pushes higher, then we should see realized volatility start to compress, as dealers will be forced to sell into strength and buy into weakness in order to eliminate their directional exposure.
- On the other hand, a move lower will likely lead to some volatility expansion, as dealers will be forced to hedge their short gamma exposure by shorting futures into the decline.
- So far, this week has played out as expected, as the 5150 strike acted as support on Wednesday, followed by a move back up to the 5200 strike.
- There has been a notable expansion in our probable volatility bands since last week, which now makes up just over a 100-point spread for SPX. Given SPX is right in the middle of our ranges, we don't have a strong directional bias either way, although we do expect the broader consolidation range to hold.
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-Craig Peterson
