AM Notes – 9/30/2022

Greetings Everyone:

• Everyone knows I am not enamored with day trading Fridays, and I am even less motivated when it is the final trading day of the month and calendar quarter. We have both weekly and quarterly expiration today.
• We are still in a small consolidation with one more thrust down possible, but also with the caveat that the Fed plunge protection team may try to spook the shorts – who look very trapped here.
• Today and Monday are likely the short-term turning point for equities, but the turn could slide into Monday. Our two recent themes have been a sustained down move from FOMC into the end of September. And then a bounce out of today’s quarter-end OPEX.
• Despite a very rough macro landscape, the equity market appears to have respected the options dynamics of time (expiration) and price (large put strikes). Despite all the market anxiety this week, the Put Wall (the strike we see with the largest put position) hasn’t changed from 9/23/22 at 3600.
• If nothing else – as a sentiment indicator – the fact the Put Wall has not moved lower indicates that options traders didn’t buy significant puts at lower strikes despite the debt crisis. And every other sentiment indicator from the Fear and Greed Index, the 10-day Put/Call Ratio, and the VIX is coiled for a short-covering rally at the very least.
• And the shorts are trapped after five sessions of pounding on the June lows with no reward. And need I say that traders established most of the puts near current prices?
• Don’t forget that several large SPX block trades will hit the tape today as dealers facilitate the JPM collar roll. Ultimately today’s JPM collar will expire, and they are likely to establish a new collar for the Dec 30 OPEX.
• Today’s market impact of this collar roll could come from intraday hedging of the position, which has a maximum level of ~$10 billion. The roll will likely impact volatility today, but estimating where and when is tough. That is why I wouldn’t say I like day trading expiration days. 
• Likely, there will be some large Market on Close prints and potential jumpiness into the close.
• After today, the JPM collar expiration impact is diminished because the position will be rolled out in time and price.
• Interestingly, today’s expiration is not that large but meaningful because it’s purely put positions.
• This put expiration is enough to give equities a bump, and that could lead to a rapid decline in implied volatility. So, we have Put deltas coming off due to expiration and Vanna tailwinds.
• Note also the movement of the TDEX “Tail Risk” index. There was a sharp move in this metric over the last week, which tells us that traders were buying deep out-of-the-money puts. These puts could get smoked on a rally and help generate a 5% equity rally rather quickly.
• We need to be very clear about this. The macro risks in this environment are massive, and it is the perfect environment for something to snap and cause limit-down style moves. That is why we favor playing rallies in call positions with fixed risk.
• Also, we base this rally view on sentiment and position analysis, nothing fundamental.
• Because we are in a Put-heavy environment with high volatility – rallies should be treated as unstable and subject to rapid reversal. Think CPI crash or even yesterday’s reversal from the 3940 Wed closing to the 3913 Thursday lows. Those were 3-5% rallies which retraced in hours.
• There is path dependency here, too. While we look for a rally into next week, we believe clearing out Put positions ultimately allows for lower market prices further out in time.
• While today’s 3600 Put Wall strongly appears to be the floor into today’s expiration, that floor is likely to be pushed lower after OPEX (i.e., Put Wall lower). Take, for example, today’s JPM collar position, which may be rolled down 3-5% from 3580 to somewhere around 3400.
•  Bottom line:
  • Look for support today at 3653 and 3602, with resistance at 3700 and 3720 (SPY 370)
  • Be alert for a swing buy signal – perhaps near the close if the algo paints a solid buy.
  • Watch your text/email alerts closely today, especially as we approach the close.
  • No day trading today.
  • Any swing trade will only be for a short-covering rally – not “THE” bear-market low. We will keep stops tight.
• Live charts will be up in the trading room.

Stay alert, and have a good weekend.

A.F. Thornton