Is This A Real Crash? Keep An Eye On The VIX For The Answer

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by Tyler Durden
Friday, Nov 26, 2021 - 11:19 AM

It's pretty clear that markets are not having a good day today, and all else equal, it's likely they will only get worse for the simple fact that gamma is now broadly negative, and more put buying (and selling) will lead to more selling (and put buying).

As our friends at SpotGamma note, for those looking at market support (and resistance), the main levels remain similar to that of Wednesday: support at 4600 and resistance at that 4650 area which is also the gamma flip point. The bulk of positive gamma is positioned up into the 4675-4700 which is where we see major resistance. As gamma is negative we anticipate large directional swings in todays shortened session. More key support details in the video below.

But perhaps more important than chartism today is what the VIX will do. With the fear index currently around 27, the VIX complex is in sharp backwardation (shown below).

This is generally what we see when markets are crashing, however SpotGamma does not (yet) consider this a full-blown S&P500 crash because, as they noted earlier this week, gamma is quite low, "and along with holiday liquidity it was likely markets were poised for a lot of volatile chop."

For today's session, SpotGamma looks for volatility to be sold near the open, and for markets to make at least an attempt at recovering 4650. However, what would cause the situation to rapidly deteriorate is if traders do elect to purchase put options. Due to negative gamma, dealers would in turn likely need to short futures, which would lead to sharper drawdown in markets.

The easiest way to monitor for this activity is with watching the VIX – a higher VIX indicates traders are purchasing put options. In this case we see a markets dropping quickly to 4550, which is a significant hedging “node” per SG's EquityHub model.

Conversely if the VIX declines sharply at the open its a signal that traders are selling put options, and that could lead to a vanna-induced rally back over 4650.

Zooming out, the S&P won't be “out of the woods” until/unless 4700 is regained.