Last month, stocks tumbled in the days immediately following the Fed's unexpectedly hawkish tilt, a move that was exacerbated by June's Quad witching option expiration which followed just two days after the FOMC, and which we warned at the time would spike volatility due to a substantial rolloff in existing market gamma. It's time to brace for another vol spike.
But first, a quick look at the market's technical positioning courtesy of SpotGamma, which in its morning note today writes that while the S&P is falling into typical pre-OPEX lull, there is an interesting “tilt” to the QQQ position. As shown below, the SPX vanna model has a right skew which according to SG infers that there is resistance above "not surprising given the high gamma in the 4350-4400 area. However the QQQ has a subtle left skew which shows less resistance at higher prices but that also means heavier selling if markets decline. This is something that we saw back in March when there were large QQQ put positions in place."
SpotGamma also note the accelerating weakness in the RUT/IWM landscape, which, along with tumbling meme stocks, has been hit hard as of late. There are likely macro-based reasons for this divergence, but regardless its something to flag (similar to the QQQ skew above).
With that in mind, we now look ahead to Friday's option-expiration, where SpotGamma sees 30% of QQQ/SPY/IWM gamma and 25% of SPX gamma set to roll off on Friday. "This will change the landscape quite a bit into next week."
As is usually the case when we see nearly a third of the market's natural cushion against sharp moves - either higher or lower - expiring SpotGamma warns that "this all equates to higher volatility next week, and as long as the SPX remains above the Vol Trigger its “party on”. Finally, as shown below, the vol trigger is currently at 4,340, or just below spot. Should this level be breached, it's a long way down to the put wall currently around 4,100.