Good evening, Traderade family. I hope everyone's had a great week so far. Tomorrow is the big day. Monthly OpEx is upon us once again.
Tomorrow we'll see $2.1 trillion of option notional interest expiring, with the vast majority in the AM on SPX index options (largely on the put side). SPX index options are commonly used by institutions to hedge their portfolios, and reduce VAR (value at risk) to increase purchasing power. We also have $430 billion in single stock options expiring in the PM settlement, which is a whopping $1.2 trillion total.
This sizable roll-off is likely to unlock greater price volatility in the weeks ahead, especially if there are any event volatility catalysts, like macro data, Jackson Hole, or otherwise which are a departure from existing market expectations. Even tomorrow prices are likely to have a larger range as options expiration days tend to come with a leptokurtic distribution of risk.
The vast majority of SPX gamma lies at 4,300, an area we've seen act as a wall as there's a significant amount of open call gamma there, including for tomorrow's expiry. We can also see that 4,250 is a key level, as we saw over yesterday's ETH and RTH trading session when it was nearly tested twice.
Below there and 4,200 is worth watching. The 4,250 and 4,200 levels are more pivotal due to put exposure and may act as support, whereas 4,300 is likely to act as resistance. It's no coincidence that we often see large resting orders around these levels.
Similar to SPX, SPY is also used as a vehicle largely for hedging. We can see significant put exposure that's been put on over the last couple of weeks. Though SPX is the preferred vehicle, SPY gets a fair amount of usage as well.
We can see the SKEW index (a measure of S&P 500 put skew) is declining once again, alongside volatility. Part of this may be because owners of SPX puts were able to reduce exposure after the FOMC minutes, and ahead of options expiration. Another may be that we're seeing 1-month realized volatility at 17.30, and spot implied volatility at 19.56, suggesting that premium is somewhat expensive here on SPX and as a result a good time to cash in some exposure in this reasonably well hedged market.
An interesting side note is that the volatility of volatility and S&P 500 put skew are showing a reasonable degree of positive correlation of late. Worth watching, but for now it simply suggests that if hedging increases markedly, volatility of volatility (and volatility itself) is likely to increase as well as these hedging flows tend to pull liquidity out of the market when puts are bought and/or calls are written.
Sentiment around QQQ, the largest NASDAQ options venue by size of open interest and volume, remains positive for the most part. Though volume has been rather subdued.
Despite positive sentiment, however, QQQ, like SPX, is largely being used to hedge exposure. We can see significant amounts of put flow over the last week, suggesting the same.
We can see the volatility surface on QQQ is leaning strongly toward put premium, especially toward some of the later dated expirations. This is yet another sign of significant hedging exposure in the NASDAQ 100 ETF.
Curiously, NDX index options are leaning positive as bullish bets expressed by calls see the highest exposure in well over a decade.
We can see this most visibly in the upcoming options expiration, where calls outnumber puts in open interest by over 2-to-1 on the NDX.
Tomorrow's monthly options expiration is likely to bring about increased volatility in single stocks as well as indices and index ETFs, both during options expiration and for much of the rest of August. I don't have a strong directional bias, but I would say that left tail risk is increasing as what appears to be a countertrend rally has been running on growth factor leadership, and that same factor is under increasing pressure as we see some upward pressure on rates and tightening financial conditions.
With earnings season more in the rear view mirror, more of the market will be focusing on what's coming next, including the Fed and macro data. As a result, I will be cautious about position sizes for tomorrow's trading day, for Jackson Hole and major macro events like the PCE data release as a result.