Option Analysis Setups: $SPY Bearish Post NFP, Should We Sell Rallies?
Weekly Recap:
● The NFP report came in better than expected, but couldn’t save the markets
● SPY closed below 400, which is our bear/bull line
● Below 400, negative gamma + puts will be in control
● Traders aren’t fully hedged yet, which leaves markets vulnerable
Major Market Indices & Option Flows
1: S&P 500 ETF ($SPY)
Last week markets attempted to build positive gamma, but failed at every attempt, closing the week below the 400 STR. Below this level, puts are in control and we expect rallies to be sold. Traders aren’t fully hedged so markets are vulnerable to negative gamma swings.
Even after a positive NPP/jobs report, markets sold early in the session with traders buying puts and selling calls.
The tricky part here is 390 is a pretty strong support level, the largest in terms of put gamma, so it will take some work to close below here. 385 and 380 are filling in gamma so without a new catalyst or a VIX spike, it will be a grind lower should we lose 390.
Above 400, the conditions for positive gamma start to build, but that will likely be resistance as it rejected heavily on Friday, even in the face of a positive catalyst. This tells us traders should have a fair amount of puts at these levels, which means they’ll defend that on pullbacks.
We think the 400-390 range holds the key to the Sep op-ex, meaning that a break outside this range will either shift expectations up or down 10 points.