Good Morning,
- Dealers remain short gamma, indicating that conditions for higher volatility persist. However, as demonstrated yesterday, the presence of these conditions does not guarantee that volatility will materialize; it only suggests a higher probability of occurrence.
- While the start of the week was characterized by a decline in skew as tail hedges were being sold back to the market makers, that pace slowed yesterday, which meant dealers had a smaller amount of delta to buy back, resulting in modestly less bullish flows in the market.
- We also saw this trend reflected in the SPX total options volume, which was down around 11% from earlier in the week, particularly in longer-dated contracts.
- On the other hand, trading in 0DTE contracts remained as active as ever, with the share of 0DTE volume nearly reaching a record high at over 56% of the total SPX options volume.
- For today, our base case is for SPX to stay between the 5100 strike to the upside and the 5000 strike to the downside.
- However, with Meta down over 15% after hours, we suspect it will have a significant impact on the S&P 500, considering it is currently the 5th largest company in the index, holding a 2.52% weighting.
- Since dealers are still broadly short gamma, any weakness driven by Meta will likely be magnified, in which case our lower band at 4950 strike would be the next level to watch.
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-Tier1 Alpha
