(Source: End-of-Day Data – Friday, 1/10/20)
• Options Activity: The call wall is currently 3275 but is positioning ever closer to 3300. Puts mark the put floor at 3250, up from 3225 yesterday. And while all eyes were on calls, deep OTM put prices fell, on average, 21% and saw significant increases in volume as a percent of open interest (32-63%). At the end of the day, 9000 put contracts for the front month 3200 strike, split into 42 transactions, were filled by the CBOE. The “flip point” is unchanged …sitting at 3200.
• Dark Pools: The index value, today, is consistent with the resumption of buying. (Prior 3 days saw early signs of distribution.)
• Valuations: Calls were cheaper than puts and with nearly every down-auction today, calls got bought. That’s call buying at a market high! This was especially evident at 3275. That example posted separately.
• Volatility: VIX fell dramatically in the final half hour of trading. Term structure remains positive. The low vol regime persists.
• Auction Market Process: The market remains in vertical development, in an up-auction, and with fairest price, today, rising to 3270.
• Safe Havens: Whipsaws in the Yen, Gold, Oil, and the 10-Year and all continued their downslide. The World Gold Council is reporting that central bank gold-buying is expected to continue into 2020 as countries continue to create a hedge against geopolitical risk and diversify their reserves away from the US dollar.
• Macro: US, Asian, Australian, and European markets all saw equities hit record highs on Thursday, with Middle East tensions easing and the prospect of a Sino-US “phase one” deal on track to be signed next week. The House approved a War Powers resolution to limit Trump’s ability to pursue military action against Iran – and that’s bullish!
Taken Together: A slowing economy, weaker earnings, high valuations, a trade war and Middle East tensions have all been unable to compete with loose monetary policy by the Fed and low rates. As a result, we saw today’s trading session ending with a bullish call buying spree. At the same time, however, we again saw high volume in OTM puts …most notably at the critical 3200 strike.
• Options Activity: The call wall is now 3275 at the 34 delta. Puts mark the bracket low at 3225 and the 29 delta. The “flip point” is unchanged …sitting at 3200.
• Valuations: Calls became pricey today when it appeared the US and Iran would not be going to war. Call volume spiked at the open. OTM puts still getting bid as investors continue to feel uneasy with this rally.
• Volatility: In after hours, following Iran’s military action, volatility futures have spiked but rapidly defervesced.
• Auction Market Process: We remain in vertical developement with fairest price between 3240 and 3250.
• Safe Havens: Inflows with the news of a missile attack …then whipsaws in the Yen, Gold, Oil, and the 10-Year.
• Macro: Tehran delivered a calculated response to Trump’s decision to assassinate Soleimani, one meant to satisfy Iranian calls for revenge without provoking full-blown war.
Taken Together: Yesterday’s Premarket Report accurately predicted elevated event risk. It also accurately predicted the level at which zero gamma would force re-hedging …which turned out to be the bounce point. But predictive analytics could not predict what would happen when price got to 3200.
In retrospect, one thing would have made the prediction of an overnight drop followed by a bounce – the fact that in today’s market, auction retests consistently get bought. Whatever downside move occurs, repo, balance sheet operations, and central bank liquidity protect the bull – spelled “asset bubble.”
Predictive metrics are consistent with a small near-term correction …some profit-taking …a pause after today’s run. Today was also the third day pointing to distribution among Dark Pools. I’m not seeing information embedded in options prices or the auction process signaling a selloff.
• Options Activity: An uptick in buying underpriced calls at 3275 and 3300. A tight trading range, bounded by high liquidity measures at 3250 and 3225. With gamma exposure remaining this high, mean reversion within this narrow range is likely. The Dark Pool Index came down 9%, edging closer to the 0.39 sell signaling level. GEX remains extreme.
• Valuations: Mis-pricings, yesterday, in both OTM calls and puts. And both saw increased trading volumes.
• Volatility: A significant reversal in the 1-week GJR-GARCH forecast, coming back down. Vol-of-vol remains range bound. Term structure and its slope, however, remains positive.
• Auction Market Process: Yesterday printed a “buying tail” at the open, followed by a “selling tail” at the close In the end, fairest price marked by the segmented auction process close to high gamma strikes. Market internals turned bullish yesterday morning with buying into the close.
• Bonds: Persistent stimulus. And US corporate debt getting inflows in response to geopolitical tensions.
• Macro: The market appears to be waiting to see how Iran responds to the killing of Soleimani. That response could takes weeks.
• Calendar: International trade (0830 AM ET), Factory orders and Non-ISM Mfg (1000 AM EST)
Taken Together: A muted response to global risk associated with Iran’s retaliatory rhetoric. Haven assets (the Yen, Treasuries, and precious metals) have all pulled back a little following recent inflows. Oil prices hit $70/barrel – a 7-year high. Corporate bonds seeing inflows. And despite repo and stimulus support, Financials have been tightly range bound since December 2. For any breakout or breakdown in the equity market, Financials will play a lead role.
Given the ~30% rally in equities in 2019, some profit-taking would seem inevitable. If, however, a downside response to US-Iran tensions occurs and takes out the 3200-3210 level, gamma exposure would likely accelerate a selloff. For now, the market appears to be in a “wait and see” mode.
Click to enlarge.
• Options Activity: OTM calls (esp. 20-30 delta) saw another day of profit-taking, more actively Friday than Thursday. Call sellers would ask for more premium in calls than presently exists. Long OTM put options volume, however, picked up further as investors perceive increased risk associated with US-Iran tensions.
• Valuations: Calls underpriced as traders cover long positions to lock in profits. OTM puts were bid up as investors continued to hedge against unpredictable geopolitical events.
• Volatility: A significant uptick in the 1-week GJR-GARCH forecast. Vol-of-vol remains range bound. Term structure and its slope, however, remains positive.
• Auction Market Process: Following Thursday’s initiative breakout, overnight geopolitical events resulted in an early session down-auction, although price settled at the high volume node, suggesting uncertainty in the price discovery process with 3235 acting as the market’s best estimate of fairest price.
• Bonds: Minutes of the Fed’s December meeting, released on Friday, reported confidence in the labor force participation rate and suggested it would hold rates low until the US economy generates more inflation.
• Macro: Mideast tensions rose on the US airstrike killing Iranian military commander Qassem Soleimani. (Jan 2: The PBoC cut the reserve requirement ratio 50 basis points and pumped $115 Bn into Financials – fueling rallies in London, Frankfurt, Paris, and New York.)
• Calendar: Fri, Jan 3: The Dec PMI® registered 47.2 percent, PMI®’s lowest reading since June 2009, when it registered 46.3 percent. Full report at https://tinyurl.com/sfhg62q | Upcoming: Mon, Jan 6 – IHS Markit Purchasing Managers’ Index™ (PMI™) Data
Taken Together: Heightened geopolitical risk in a market supported by liquidity injections by the Fed and marking new highs. Increased flows into the Yen, gold, and bonds. Profit-taking and increased allocations to protective puts in the options market. A more pessimistic volatility forecast by GJR-GARCH, a reversal in m(vol) Γ ATM, and a loss of upside momentum. These are the sort of conditions that result in an auction that either retraces to its last node or spends its time rotating – i.e. going net nowhere.