Options flows blocking a market breakout


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The following is a guest post courtesy of Michael Kramer of Mott Capital Management.

Key Takeaways

The S&P 500 maintained a tight trading range of 4,100 to 4,150 during the week ending May 12.
Despite significant efforts to push the market beyond these levels in both upward and downward directions, the influence of hedging flows in the options market effectively neutralized these attempts.
SpotGamma, through two crucial data points, has highlighted the significance of these trading ranges. The volatility trigger has acted as a support level for the S&P 500 at 4,100, while the key gamma strike has served as a resistance level at $415 on the S&P 500 ETF (SPY). These levels have effectively kept the market confined within this narrow trading range.

The impact of options flows

Over the past few weeks, the options flows have played a crucial role in driving the market and have been the primary factor behind the stock market's confinement within a narrow range. These options flows have been influential in keeping the market range bound. As long as these option flows remain unchanged, the market may experience this tight range for some time longer, with the next opportunity to shift coming after the May options expiration.

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Option flow dominates trading

The Volatility Trigger level can serve as both support and resistance and, more importantly, can mark where hedging flows can shift from supporting the market to trading with the market. Meanwhile, the Key Gamma Strike is the level with the greatest concentration of gamma.

The importance of these levels is apparent when viewing them in action on the SpotGamma HIRO Dashboard. For example, on May 11, the S&P 500 traded lower during the session to the Hedge Wall, which has a similar impact to the volatility trigger. The index found support when the index reached that hedge wall at 4,115. That level found support because option delta flows shifted from negative to positive in the morning and mid-afternoon sessions.

HIRO chart may 11 2023

SpotGamma HIRO: The red arrows show the rising delta flows and the rising market off the hedge wall

In addition to the levels on the S&P 500, the options flow on the S&P 500 ETF, the SPY, has also played a significant role in preventing the overall market from rising. The data reveals that while the call wall on the S&P 500 has been situated around 4,200, the Call Wall and Hedge Walls for the SPY have been observed at levels ranging between $413 and $420. Generally, when the SPY approached the $414 to $415 range, option delta flows tended to decline or could not maintain positive momentum. This suggests a trend of selling calls and purchasing puts.

spotgamma hiro spy declining delta options flow may 12 2023

SpotGamma HIRO: The red arrows show the declining delta flows and the falling market as the SPY traded up to the $413 to $415 range

In addition to the levels on the S&P 500, the options flow on the S&P 500 ETF, the SPY, has also played a significant role in preventing the overall market from rising. The data reveals that while the call wall on the S&P 500 has been situated around 4,200, the Call Wall and Hedge Walls for the SPY have been observed at levels ranging between $413 and $420. Generally, when the SPY approached the $414 to $415 range, option delta flows tended to decline or could not maintain positive momentum. This suggests a trend of selling calls and purchasing puts.

Levels have been unchanged

According to the SpotGamma Equity Hub, the historical data reflects that the Hedge Wall, Call Wall, and Key Gamma strike levels have remained relatively stable and unchanged over the past week. 

The Call Wall in the SPY has consistently been positioned at $415 or $420, while the Key Gamma Strike has always been at $410 or $412. The Hedge Wall has been observed to be between $410 and $413. As long as these levels continue to remain stable and unchanged, it is unlikely that the S&P 500 will experience significant movement. 

The options flow has been relatively consistent, except for an unexpected news event or macro data that alters the market's perception and behavior.

10 day history s&p 500 may 12 2023

SpotGamma Equity Hub: These are the historical changes for gamma levels in the SPY

Over the past few weeks, the options flows have played a crucial role in driving the market and have been the primary factor behind the stock market's confinement within a narrow range. These options flows have been influential in keeping the market range bound. As long as these option flows remain unchanged, the market may experience this tight range for some time longer, with the next opportunity to shift coming after the May options expiration.

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