Will 'Gamma-Gravity' Stall The S&P At 3,900

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by Tyler Durden
Monday, Feb 08, 2021 - 08:48 AM

What melts up (under reverse gamma-gravity) must come down (under gamma-gravity)...

Last week we described the likely 'crash-up' as the "huge gamma strike" at 3800 was blown away and the big Call Wall at 3900 enabling a 'reverse gamma gravity' meltup.

This morning the S&P is set to open at the 3900 Call Wall resistance point. 

Source: Bloomberg

However, as SpotGamma warns, we do not see markets holding higher prices until this level shifts higher. 

The dealer hedging force is mean reverting back into 3900 with any materially move above/below being pulled back into the Call Wall Strike.

With notional gamma levels holding from Friday we see a ~80bps range on the day, and note a very large Combo bar at 3909. This all leads to us calling for a “pin” today of the 3886-3909 SPX level.

This Call Wall level does not appear poised to roll higher, either.

Note the chart below of gamma levels, and you can see how much larger the positive gamma is at 3900.

The 4000 strike is the next largest positive gamma strike but it will take some fairly large position changes to swing the Call Wall to that level.

Those looking for higher volatility may want to shift to the QQQ/NDX which holds very flat gamma levels.

To the downside we note 3850 as large support, but do not anticipate that being tested today.

The major gamma flip points remain at 3800, and that “gap” signals light hedging >3800.

This is not “todays” issue, but points to future volatility. To this point its likely that the options structure doesn’t change materially until 2/19 monthly OPEX.

Aditionally, we note that at the same time as futures stalled, 30Y Treasury yields hit 2.00%...

Source: Bloomberg

Immediately rolling over as perhaps investors suddenly find that TINA is dead again?

Source: Bloomberg

10Y yield is now at its highest (bonds cheapest) relative to stocks dividends since July 2019.