What The Gamma Levels Are Telling Us Right Now

What's up everybody? Today is Tuesday, September 8th. It's 11 o'clock here uh just outside of New York City. I'm happy to be back with everybody on the Tasty Network after Labor Day weekend. And as Jeral was just saying, there's a lot of stuff coming up and a lot of signals in the options market that are uh super interesting. And so I kind of want to dig into that. I want to also touch base on some of the things we're talking about last week in terms of the mean reversion in the volatility space particularly that tech space. We had been talking about this idea that tech could start to break away and there was a Goldman note that came over this weekend that was touching on a lot on a lot of those same ideas and so I kind of want to dig into that. So, uh if we can we'll turn on the old screen share here and we will dive on in. I appreciate also a lot of the feedback from the Tasty Trade community. It's been uh it's been amazing. As we get started here and glad to know that some of this information and data has been helpful. Uh I want to talk about today, starting with today. Um generally what happens in this market is when there's not much going on today, like there's just no big news. There's no big earnings releases uh this morning. There's no data prints really. Um the zerodt people tend to come out in size, right? Because they look around, they say, "Hey, Coast is clear. Let's do our thing." And they did their thing in a pretty interesting way. That's a new way. Some of you who track zero DTE uh I think will find this pretty interesting. And when you're sort of looking forward, yes, there's PPI and CPI and things like that. There's a 60% chance of a Fed rate hike next week. Uh the CPI obviously is on uh Friday. And so when we're thinking about what the market is going to do over the next, let's call it 3 4 days. The answer is probably not much on the index side. There's some single stocks that are doing some pretty amazing things. I'm watching Tesla here. Uh it's breaking back to 365 after highs. There's the Apple event. We could talk about those VSS as well. Um, but the overall market, the S&P at this point pulling away from 7700 before Tuesday, excuse me, before Friday and before really quite frankly next week when we're looking at uh the FOMC on the 16th and you got VIX expiration, OPEX all crowded in there as this pivot point. You know, that's kind of the more uh that's the time frame we're watching for more of a breakout or breakdown in the markets. kind of this pivot point where things really start to shift on the index side of things. Um, and all that these pivots are going to happen inside of a really interesting dynamic. So, the first thing I want to talk about here, this is our trace heat map and it's showing you the latest in dealer gamma positioning. And the thing that I wanted to show is so fascinating and if you're a nerd in the zerod space like I am, you're going to find this particularly interesting. But typically around 10:00 in the morning, these positions will come in. And so when we started today, this is the S&P 500 here. And these are just zero DTE positions. And you can see there is a pretty large uh 65 uh 7650 7655 zero DTE excuse me 7645 zero DTE put spread. So someone comes in and they sell this put spread. Oftentimes these will show up as condors but systematically these flows will come in around 9:45 to 10:00 typically. Many of you are probably familiar familiar with Captain Condor who blew up famously last Christmas Eve and he was putting on this giant size. Now our research shows that these big zerodte flows tend to suppress volatility and in our view what happens often times is the market will move to one of these levels where there's a five or 10,000 lot zerod position and we kind of just stick to that level. And so what actually happened here is kind of fascinating because as I played the day forward, what you're going to see is the market slides down. This is the candlestick chart here. Uh I'll turn off our delta indicator here just to make things a little easier to see. And when you see the market fly forward and and the reason I'm bringing this up is because this is going to be an interesting thing to keep in your mind for risk as we go forward. We slide forward here and you can see the position gets to be a 10,000 lot, right? as someone is selling the put spread in bigger size right around that 10:00 time frame, positions are added to or an individual adds to their position. And you can see the bottom leg of that put spread uh at this time is 7645. There's 6,000 there. But look at the 7640 position. There's uh 2,000 lot there. So there's two two groups or two types of people doing two things here. Someone's selling a five handle wide put spread. Someone else is selling the 10 handle wide put spread. And then what happens as the market drops, you can see here, and it's a little tough to see on the map, and I apologize if you can't quite make this out, but see how there's a black tip to that bar. What somebody started to do as the market crashed is they started to take their long leg of their put spread and they rolled it down to the 7640 as a way to gain a little bit of extra money on that credit. Now, some of us in the Tasty Trade community know about put spreads and selling options and selling spreads and saying, "Hey, you know, I can probably uh squeeze a little more out of this position, take on a little more risk by doing this roll from 7640 to 45." But when I look at this and I think about Captain Condor and how he famously blew up on typically five, sometimes $10 wide call spreads, rolling this down in particular in that size is adding a little bit more negative delta to the market maker position, but it's also adding a little bit of extra kind of juice to the risk that could be uh in the market for these traders specifically. I don't think this is like systematic risk for the market, but this is behavior that I've not really seen this kind of active role. And what it does is on an intraday basis is it adds to some of the noise in the market and some of the delta uh that's getting traded. And what I mean by that is if I turn on this indicator, this we call this our hero indicator. And what hero is doing is it's measuring the delta of all the trades taking place. So what happens when somebody is long a put, right? The market maker is long the put cuz the uh the trader short that put and they roll it down, it changes the delta exposure. And on a 3 4,000 uh lot position that's changed instantaneously. that can be a fair amount of deltas. And so what you see is as this position is rolled, it adds to the deltas of the position. So you'll see this purple line drop and then you'll see the S&P often times act in kind with that. And so I'm covering all of this for two two reasons. Number one, those of you who are the big zerodt kind of nerds who follow this stuff like me on a daily basis, you're going to find that behavior fascinating. The second one is that on an intraday basis, these trades now are big enough when nothing else is going on. Right? today is just zero DT because there's no, you know, no news, nothing to watch out for. We're not worried about anything. The rolling of those positions creates shifts in the delta position that we can monitor and we can see those flows show up and that times with changes in the S&P itself. And so what can happen on a day like today, I think often times is you see the market start to sell off. You see these chunks of uh of puts being traded and traders can start to get nervous about the dynamic that's taking place. Oh no, everyone knows there's going to be a rate hike now. Now I got to start to worry about uh the macro positioning here in the market. That's why people are starting to sell off their positions. But in reality is all that's happening is these zerod people are coming out and it's causing shifts uh in the flows that's just bringing a little bit of negative movement to the market. And if you look at Tesla and some of the other names that were trading, the semis were up today. Everything else kind of up. So there is this just churn due to flows. And now what you see is shortly after this roll trade happens, if you watch right around this 7,700 level, you'll see that somebody came in and then sold the call spread. So we have a matching call and put spread now at about 8,000. And so as we stand right now as I fast forward through the day, you have these twin barbell kind of positions. And I think one of those two levels is going to get tagged uh because there's such a large zerod position there. And you can see that here for 7,700. There's 9,000 lot on the day. And this is what the market makers are holding. So all that's happening today is just these kind of zero DTE gains I guess I would call them. And it's so important now to know when you're looking at the size of flows on a daily basis. If we go and look at this chart here, you know, 70% is the high 76% of the S&P flow being S&P specifically being zero DTE. It's sustained at over 65%. That's just SPX. Uh if you change and say, hey, what is the flow at 5 days or less? It's like 80% of the flow is uh in S in the S&P and also in the Q's is 5 days or less in terms of tenor. So it's all this shortdated flow that's just chunking and turning around and it's important notes to to watch. Now I wanted to pivot to a couple of ideas. Last week we talked about the reversion in the dispersion index. Uh if you all remember schoolhouse rock seems like some of you may be too young but reversion dispersion conjunction junction some kind of a similar thing. All right, talking to myself here. So, I'm I'm going assume that everyone laughed about that. Uh the CBO volatility uh semiconductor volatility index is getting a lot of run on X this week. And this looks exactly like the dispersion chart if you remember that we were talking about I know we talked about Jamal and I think we talked about it on my segment last Tuesday. See this reversion in the dispersion back to what you would call a mean. Right now it's an index so you want to kind of avoid in these volatility indexes doing kind of technical analysis on it. Um but the point of showing this chart was all the stock up movement in the AI tech sector stocks right anything involved with AI the semis uh memory all that sort of stuff we all know that right like crazy into May and July uh excuse me April May June and then in July we had the situational awareness kind of collapse. We had the margin calls in Korea and a little bit of you know token anxiety some stuff like that and bam those stocks come down and the VA associated with those names also comes down and so we were making the argument last week that it was a much healthier environment from the options perspective and also these options that were leading the dispersion rally are are cheaper now right and the idea was like hey if tech can like Dell and some of these other earnings were so strong if Hex starts to get a bid and the ball picks up, they may be strong enough from a balance sheet perspective, an earnings perspective, an AI kind of construct perspective that a rate hike or changes in the rate environment may not matter as much to those names just because their growth is so phenomenal. And so with that, the idea is like, hey, if tech starts to break out and dispersion starts to rally, it's because people are starting to buy into calls again in the tech space. And maybe that tech rally can happen irrespective of uh what is going on in more in more of the macroe equity market or macro piece. And so if you look at this chart and you look at how dispersion has been creeping up over time and I just said don't do technical analysis on this but you can see this trend is clearly higher in dispersion. What specifically is this telling us? People are buying idiosyncratic calls uh and idiosyncratic sectors. In other words, we don't buy calls so much on the S&P 500 to get long. We pick a spot, right? I'm going to pick the memory names. I'm going to pick the semi names. I'm going to pick the uh hyperscalers. I'm going to pick the droids or whatever. Uh or drones, excuse me, or droids. I guess we're going to have both of those soon. Um and so that creates higher dispersion because the index v is lower than individual component v. And so again, if people start to say, "Hey, I'm going to buy SanDisk or Apple or AVGO or whatever it may be, then you can start to see that individual vault start to pick up again." Um, and if you look at the performance of the NASDAQ over the same time frame, and I just show you this new uh I had the the chart down here, you can see how the NASDAQ really started to outperform, right, over this period. And if I was to add the S&P performance to this, what you would see is that the actual performance of the S&P has lagged tech, right? And the tech is the S&P is a heavy tech heavy sector, right? But the NASDAQ, which is pure tech, has really started to outperform. And so that's the thing that I'm really watching here as we talk about the Apple event coming up, as we talk about the reversion in the dispersion and the tech falls getting cheaper. Um maybe even though we have a rate hike coming up next week in all likelihood that's the 60% odds that if we start to move into October and we're looking at the anthropic IPO potentially coming out and we look at a potential rally into midterms um you could see that tech really continue to outperform and if that outperforms it would likely happens with V moving up and so my pitch here is saying hey look if we get long tech options in in the right sectors and we're looking at the November time frame for getting long those we benefit. We could benefit from potentially price appreciation, right? The stocks are going up in value, but also if call skew starts to lift up and that V starts to lift up and dispersion starts to move back to these highs, then you could potentially see uh another benefit to owning calls or owning optionality into that upside. The other benefit obviously of owning calls in this situation is if you're wrong or we're wrong and the tech doesn't rally uh and and rate hikes scare people and the market starts to crash, well, you had fixed risk, right? uh by laying out the premium in those calls. Now, conversely, what is interesting about it at this moment um you know, and again, this was the thing that Goldman highlighted was that tech ball coming down. We're going into this moment in our founders note this morning. I write this every day, but I wanted to show you the chart here of what's been happening over last week. Um you can see the semis are rallying more, right? SMH, this was Jackson Hole about a week ago or a little over a week ago. Um, semis rallying. Q's up a percent from that Jackson Hole, maybe you want to call it flat in that near neighborhood. S&P is underperforming NASDAQ by a percent. And then look at the IWMs. They're down a percent and a half. Now, a lot of you know that the IWMs are most the most rate sensitive, right? They're kind of the lowest components in terms of value of uh of our economy and of our stock market, right? uh and as stocks perform well, they're in the IWM, they naturally graduate to uh S&P 400 or even the spiders over some time, right? So, the IWM is naturally going to lose its best performers and keep kind of the bottom tier of of stocks. That index is down one and a half% since Jackson Hole. So, it's underperforming by about two and a half percent over the Q's. Why I think that is so interesting is because we're gonna get a rate hike. And so if you're going to be scared about a rate hike and you were going to pitch Armageddon coming here in the next couple of weeks, you would probably start piling into some put protection, right? You would start to bid up balls a little bit. You'd start to say, "I'm really worried about CPI. I'm worried about Jackson Hole next week. Uh I'm unsure about the midterms. Like, oh, so many things to be worried about Iran, etc., etc." And instead what we find when we look at the volatilities of the major components uh of the market you kind of see not much and when I say that is because when we look at this chart here if we had a high ball situation the only thing that's showing us high ball in this market right now is DBA. I know it's cut off. That's the uh commodities basket ETF right that has extremely high implied balls at the moment which is I think is a signal. Um, but I was just talking about IWMs, right? IWM's underperforming down a percent and a half or last week. The IV rank for IWMs right now is 0.7. So that's less than one. So what this is saying is the implied V here is lower than it's been over the basically the the whole last year. Now it's up a little bit from over the last like month or two, but this is essentially saying that V or implied V options prices on a blanket statement in the IWMs. Look at the S&P here. It's IV rank of three. This is bottom basement volatility prices. And so when I'm thinking about, hey, what if we're wrong about tech starting to rally and and I want to think about maybe getting long some of the tech tech sector, right? How would I hedge out being wrong? Well, if you're looking at IWM and said, "Hey, Brent, I just bought uh puts or put spreads when IWM IV rank is uh 0.7." As a as a trader, I'm going to say that kind of makes sense, right? A famous trader I once knew and worked with often told me sometimes you just buy options because they're cheap. And in this case, when you look at the cattle's coming up, uh, and if you want to hedge downside, even if you don't want to buy tech calls, if you just have an equity basket that you're long right now, and you want to think about the risk of a rate hike causing trauma to the market, well, I think look no further than hedging yourself with some IWM options, uh, can make a bunch of sense. And you know what is interesting too about this is you're looking and we're gonna go here and we're going to look at the IV percentile and then we're going to look at uh excuse me flip this around. I'm look at call skew percentile and I'm going to look at put skew percentile because I think what's happening here in the IWMs in particular because the volume is so low there's not a lot of demand for downside. That's clear. But I also think it's a lack of belief in the upside right people just don't want to buy those calls anymore. It's not necessarily that they clearly want to buy puts either. And so what you see here in the I IWMs is a call skew percentile of 30%. Calls are very uninteresting. People are very uninterested in in in calls. That put wink has an 86 percentile. So what does that mean? The 25 delta put relative to the at the money put has a 86% rank. So there is a little bit more of a put skew there than the call skew. But again the IV rank overall is just so low uh that I think that these hedges are really very cheap into this catalyst of events. And I actually think that the catalyst of events is going to be kind of a non-event. So many times we go into these events pricing in very extreme balls. And usually what happens is we call this event ball. The event passes and that vault related to the event comes out and then the market sort of just takes that ball. We call this vanna. The ball contracts and it helps to lift the market up. So in this case we're looking at the S&P term structure and as you can see here I have the last 60 days. I'll go back to the last 90 days. So the shaded cone is the last 90 days and look at the term structure for all of October, even out into November. At this moment, I think the balls will lift for midterm elections soon. But at this moment, we're at the bottom of the last 90 days, right? S&P is about a percent off alltime high. So if you look at, you know, the skew slide, we could call that and say, okay, well, part of the reason the volumes are low is because the market has rallied so much. Um, but you know, this is not a market that has a ton of anxiety about it, even with these events coming up. Now what I've added here, this light teal line is what we call Ford implied V. Ford implied V is a way to assess what the market is pricing in for events. So it looks between two expirations and prices in what the volatility or IV is between those two events. So if you look at CPI for example, Thursday uh Thursday doesn't pick it up. Friday does pick up CPI. So what's the difference between those? And what you see is there's a big pop here in the event ball for CPI. So this tells me the options market cares about that. Options market cares about next week with the Fed conference. And then the big one here seems to be uh midterms, right? So what does this mean to me? These the fact that Ford implied Vall is above the term structure here is generally telling me that I don't expect V to drift much lower at this juncture, which is not surprising because we're at these lows. I think the market's just going to kind just going to kind of drift along here. And then when you lose the CPI event, when it passes, let's just say that nothing much happens there. That event ball will will contract a little bit. We'll then move to the Fed conference. Maybe we get a hike. Market's pricing it in. Maybe it's no big deal because the market's already priced it in. And then people are immediately going to start looking at uh the midterms, right? Because that's the where that news cycle is going to pick up. So once we lose CPI and the Fed conference, even if we get a hike, I think that ball still can contract. Uh and that should or could help keep the market up here. And then we're going to start looking into October. And I think the world consensus is that the market wants to rally uh due to the midterms because of Trump and Bent and how focused they are on the stock market. That is the consensus view. I think a lot of people are scared to short uh you know we've all learned with oil, right? Uh they are successful in jawboning things higher or lower asset prices higher or lower and they're very queued in uh on asset prices. And so, you know, that's just something we also want to think about if we want to heavily short this market into that big uh political event. So, that's the landscape of things that we're uh seeing overall here. I wanted to brooach on two quick things. This is a new thing here we have called our dealer gamma map. Now, many of you are familiar with positive and negative gamma. And so, I wanted to show a longer term nonzero view of the S&P 500 as we stand right now. So, if you see blue on this map, that's telling us that is a positive gamma position. And if it's red on this map, that is what's called a negative gamma position. So positive gamma position should be a market that is supported or we have relatively lower volatility in and around those price areas. Red, if we enter a red zone, we should see faster price action. So when we're looking at this map, and this map doesn't include zero DTE, right? So that's a critical thing to understand. You can see there's a light area of positive gamma tied to or into 918 expiration, right? So this is through to next week. It's a huge expiration uh next week with the quarterly expiration, pardon me. And so this positive gamma here is right around where we're turning right in the S&P right now. And that is a level that doesn't appear to really want to go away until OPEX. And if you look above all the way up into kind of 7,900, you have a little bit of a gap there into 7,900 you could argue. Um and so the argument I'm guess what I'm making here is we're looking at this, we have this support level, we have this little bit cushion of support. the market doesn't also have a catalyst to move up yet because we do have to move through some of these events CPI uh FOMC etc. And so, you know, we're we're on this cushion of that will absorb downside volatility, right? Then you add in the zero zero DT people coming in and I just think that the market is going to kind of stick here and not do a whole lot until some of these catalyst pass or if we get positive tech catalysts, then you could start to see this market start to rally. And if the market starts to rally, what I think is interesting at this juncture is the only positive gamma above once you kind of get through the 7,900 area, which basically disappears at 918, you kind of have this runway of negative gamma at this moment up into that 8,000 area, I would say. And I think if we start to rally, people will sell calls and then you'll start to see blue fill in this map and you'll see that resistance zone build up. But the market has very light positioning. Uh, if anything, dealers have negative gamma after 918 expiration. And so the market is poised to start to move quite a bit. Um, and so what's the takeaway from this? We have this cushion of support over the next week. I think on the index side, it's going to be sticky and not a whole lot is going on, but I think the single stock side could start to move particularly in tech. And as I say that right now, I'm watching SpaceX start to break out a little bit here. Tesla's really starting to rip. And so you can start to see these things uh come together where that index ball can start to move. Excuse me. The index ball stays very quiet and that single stock ball starts to move. Now, what what does that mean? How do I bring this all the way back to the start of the conversation? Well, if that does start to happen, then what's going to rip? Dispersion index is going to move much higher, right? Because the single stock falls are going to go quite high uh where relative to the index falls, right? So these are I'm trying to put together all these components uh in kind of real time here uh for you and and piece this out and understand how we could take advantage of this uh as individual traders. Now, what about um Apple? Because I know Apple has a big event coming up. And if we look at the uh matrix of prices here, there's a couple of interesting things happening in Apple. And so, if we just go and look at the top stocks, we go to this explore view. What you can see here is the Apple implied va is a rank of 47. Uh it also has a risk reversal of 91. So, that fits in with the other top stocks here where across the board people are leaning into calls, right? There's a positive call skew. we call this uh across top single stocks particularly in the tech stocks. We also see that the IV rank for Apple again is very high. it's pricing in essentially their event here like a earnings event and so there's a lot of expectation here uh for Apple to do some good things as people are leaning bullish and and and positioned for that and kind of like last week with AGO and and also in the Dell earnings you know the call skew here being quite rich I think is the component that we could kind of mine into this event because everybody is leaning number one high volume but also um high uh call skew uh which tells me that hey everyone's already leaning bullish usually after the events these things start to cool off a little bit. But the other thing I want to denote from this whole map is this is a market that is leaning long and kind of just waiting for an excuse to continue that upside. I think particular particularly in those single stocks. So um you know this to me just has a waiting for a waiting for permission to rally uh type type uh stance. I think you can hedge out with IWM or spider puts or put spreads into these events versus long single stock tech. Um and and uh I think that could be a pretty successful uh position as we move through next week with CPI, OPEX, uh FOMC, etc. and then start to look at the midterms. Uh so with that, uh my time is up here. I appreciate everybody here. If you go to spotgam.com/tasty, we have a great giveaway for people. You can sign up to get some of our reports for free there. So spotgam.com/tasty. I'm going to see everyone here on Thursday. I'm going to be joining Jamal for uh a couple minutes to chat markets and then I'll be back uh next Tuesday. So, thanks everyone for your time today.