Good Morning,
- Dealers remain short gamma, which means the conditions for higher volatility are still firmly in place. However, it's important to note that we're now closer to the bottom of our gamma curve, which begins to level out below the 5000 strike.
- While we anticipate volatility to remain elevated below that level, dealers would be generally well-hedged against downside convexity, making the 5000 strike a strong potential support level in the near term.
- However, with the April options expiration just around the corner, we expect some repositioning to occur at these lower strikes, potentially pushing the bottom of our gamma curve even lower.
- Overall, we estimate that around $1.2 trillion in SPX/ SPY notional open interest will either expire or be rolled into the May contracts this Friday, which will remove a large amount of gamma from the market.
- Consequently, dealers will likely remain short gamma after the expiration unless the SPX can climb back above the 5200 strike by then. That said, it's important to note that we've seen skew increase the most in 30-day and 90-day contracts, which will remain unaffected by the expiration.
- Our SPX probable volatility bands have continued to trend lower, putting the 5025 strike back in play. However, given how close the 5000 strike is at this point, we wouldn't be surprised to see a test of that level on a strong enough downside move.
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-Craig Peterson
