• Options Activity: Options volume was high at ~1.8 million on Friday. After several days of traders accumulating protective puts, $SPX put in a wide-range down day. The vast majority of transactions took place at deeply OTM puts with the put floor at 3200. OTM put options premiums rose. A break below 3235 would induce selling as negative gamma would prevail. Call volume was highest at 3325 and the majority of that was short covering. As of Friday’s close total dollar gamma was $1,073,328,213.
• Dark pools remained buyers.
• Volatility: The spread between the first and third months in VIX futures is rapidly shrinking. Realized volatility exceeded implied vol. VVIX increased.
• Auction Market Process: Sellers are in control. The market condition is the start of distribution, following a wide range drive down. The market was previously capped at $3,337.77. On Friday, Jan 24, fairest price was $3,275. A break below would likely find support at $3,225.
• Macro: China’s coronavirus worsens to a grave situation as the death toll rises and contagion becomes the issue, globally. Brent crude dropped about 6 per cent over the week, reaching its lowest level since early December. News reports of rocket attacks on the US embassy in Baghdad add to geopolitical tensions. Gold-to-oil ratio is the highest since June 2017, which suggests more downside for indices.
Notably, the US 10-year yield has fallen to 1.62%, which could clear the way for 1.51%, along with revived concerns about yield curve inversion. The Yen leads in Forex trading.
• Calendar: January 28: 6:00 a.m. US FOMC meeting begins, January 30: 7:30 a.m. US Jobless Claims and more tech earnings this week. New home sales are due today.
The growing coronavirus outbreak, has claimed at least 80 fatalities and has sent the number of confirmed cases to 2744. Fears of contagion and the economic impact of global infection is sending risk trades down.
Friday represented the steepest drop in more than 3 months the majority of metrics point to continuation to the downside. Financials are already down ~2.2% YTD, a strongly bearish indicator. Junk sold off hard, on Friday, while safe havens got a bid with utilities leading Treasuries.
CBOE $SKEW is at 127, a level associated with a 14.5% probability of a 2-standard deviation move to the downside.
The Fed meets in Washington for their first policy-setting meeting of 2020 on Wednesday.