Premarket Report for Wednesday, January 22, 2020

Options Activity:  The contraction in long gamma we saw with last week’s OPEX currently allows $SPX a little more room for momentum-based moves.  The high gamma strike lies above at 3350 with 3375 and 3400 coming in second place.  Increasing gamma at those levels would be bullish.  Today was the third day in a row for a 10,000 lot position at the 2690 put strike. 

Valuations:  Calls remained underpriced while OTM puts were bid up as investors continued to hedge against a sharp downside move.  Dark pools were buyers today.

Volatility:  SPX down 0.28% and VIX up 6.2% Tuesday.  Expiration of January VIX futures is Wednesday.  The front month VIX spread between February and March is about to contract the level of contango.  While there seems to be a bit of anxiety among volatility traders related to Super Tuesday (Mar 3), it would take a large vol shock to invert the current positive term structure.  Notwithstanding, vol-related strategies are gaining traction.

Auction Market Process:  A prominent point exists of control at 3250.  Another test of the recent high at 3330 sold off on news but promptly found buy stop orders initiating new positions and day-traders exiting short positions at 3320. From an auction perspective, those levels mark the current balance area with  3330 marking a selling tail and 3320 currently serving as the auction bracket low.

Macro/Currencies:  Weakness in gold and continued strength in $DXY, Tuesday.  Concerns about China’s gold purchases may be short-lived, however. Palladium sharply lower on coronavirus fears but, it too, quickly found buyers.  Still another reaction to fears of coronavirus contagion brought down Treasury yields and powered a rise in bonds.

Taken Together

Fears associated with coronavirus brought $SPX, $HYG, gold, copper, and palladium down and triggered flows into Treasuries and volatility strategies.  Sector rotation into Utilities continues.  Clearly, traders are jittery at this level.  Dark pools and gamma exposure, however, supports continuation.

Note:  Bullish options strategies to consider at these levels include put-writing strategies to build equity exposure, defensively, and long calls, currently “on sale.”  Hedges appear to be focused on 3300 ($SPX) and the 20 strike for $VIX.