• Options Activity: Over the past few days, we’ve noted underpriced OTM calls being accumulated, seen in the data largely between 3330 and 3400. Simultaneously, protective puts have been accumulating in the 3250 to 3300 strikes. So “…max pain” at the put floor and gamma flip at 3250. These same high dollar-gamma levels also mark auction brackets and even fit within the range for this week’s implied move. Wednesday’s AM activity began with more call buying but ended with put buying (posted earlier). In the event of a shock, all of those long calls might be expected to exacerbate volatility.
• Valuations: Calls remain underpriced and OTM puts continue to get a bid. Dark pools buyers Wednesday.
• Volatility: VIX futures rose to a high of 16.5 overnight. Vol strategies have increased weighting in the front month. VIX is primed and ready.
• Auction Market Process: A selling tail at 3337.50; a down-auction to 3312 overnight. Rotation in S&P futures overnight, following yesterday’s close, between the low and 3325. 3325 is the level to watch for rejection.
• Macro: Oil’s slump deepens. Gold down and sideways. Treasuries and the Yen on a roll. Sector-wise, utilities remain strong.
• Calendar: Weekly jobless claims data: Can the consumer propel an economy whose manufacturing sector has weakened? More earnings …and INTC is the market mover to watch.
Clearly, fears associated with coronavirus contagion continue to weigh on risk. In addition, the market is top-heavy on calls – both long and short! Frankly, I’m a little surprised at the market’s continued appetite for calls and the paucity of new positions in ITM puts. Deep in the money puts are a synthetic short position. At this writing, it looks like S&P futures may open at about where we closed yesterday.