It’s Friday, so strap in …
The 3900 level is the highest net negative gamma put strike for SPX.
What does that mean for you?
It provides a strong support level for the market since some long put holders may have been looking for a trade down to that level, so they were happy to lock in the profit.
On the other side of the initial put purchase are the option dealers who initially sold the puts (a long stock trade) and sold stock to delta hedge the position …
So, when customers were closing the long put positions, dealers closed their short put positions and covered their stock hedges.
That was the fuel for yesterday’s late rally.
Today, I’ll share the data that confirms the option flow and look at where we can go from here.
Combo SPX/SPY Option Flow
The chart below is worth a thousand words because the option flow diverged from the stock price …
The fact that dealer hedging activity was counter to price right at critical support was a great signal that the intraday down trade could reverse.
The blue line is the put activity. Positive delta flow is put selling and vice versa. For calls, positive delta flow is call buying and vice versa.
Notice how, at the end of the day, the flows reversed a bit as new customers may have used the intraday rally to buy put protection and sell calls.
So, where does that leave us for today …
If we look at yesterday’s put and call volumes across strikes (below) we can see most of the volume took place at the 4000 strike, which is the highest open interest strike.
4000 provides major resistance above … Now, if buyers take control and push the market above 4000 then dealer delta hedging activity will turn positive and will pressure volatility lower/stock prices higher.
Bring It Home
I will look to set up bearish SPY or QQQ trades if we rally off the employment numbers reported at 8:30 am, which came in at 315,000, below expectations of roughly 350,000.
SPX could possibly test resistance since bad news for the economy is good news for the markets …
Why? Because bad news for the economy could lessen the risk that the Fed raises rates. Yes, it sounds backward , but that is the environment traders live in with inflation.
I took off some nice winners over the past couple of days when the market got down to the 3900 area …
- QQQ Sep9 296/294 put spread for a 68% gain
- XLF Sep16/Aug19 put calendar for a 185% gain
- EWQ Sep16 put spread for a 70% gain
I will look to reset bearish positions on a test of 4000 or a failure from the 3960 area …
Good luck today and as always …
Live and Trade With Passion My Friend,
Griff