If Nvidia Cracks the S&P 500 Probably Does Too

The S&P 500 fell by around 1% today, but the carnage across the market continues to worsen, with multiple sectors and parts of the market breaking through support levels that suggest more pain lies ahead. The only problem is that, for now, the S&P 500 is supported by a massive level of put gamma at 6,800, which is holding things together. Once that gamma level is eroded, and I suspect it will, the index will likely crack.

For now, the only thing holding things together is Nvidia, and I do not think that glue will last much longer. The company will report results on Wednesday after the close, and unless they do something out of this world, I think the stock will trade lower.

The delta positioning in Nvidia is very positive, and unless the stock trades over $200 after results, it is likely to head lower. The implied volatility of the calls is elevated and will fall sharply once the company reports results. Therefore, if customers are betting on the upside and market makers are short calls and long the stock as a hedge, after the calls collapse in value from the IV crush, market makers will likely find themselves overhedged and will need to reduce that hedge by selling stock. On top of that, anyone who owns the calls at higher prices may very well become sellers too.

So the key level for Nvidia on Wednesday post-earnings is $200. If the stock can’t get over $200, the stock and the entire market will have a giant problem.

Tomorrow is a settlement day, with $15 billion due to settle, followed by $22 billion on Thursday, $37 billion on Friday, and $59 billion on Monday, March 2. That is a lot of cash that the Treasury is looking to absorb, and given the T-bill calendar, we should see another $15 to $20 billion on March 3 and March 5. So the liquidity drain is alive and well and not going anywhere anytime soon, but we will have a better sense of what comes next week starting tomorrow.

-Mike

Glossary by ChatGPT

Delta Positioning: The net directional exposure in options markets that reflects how much an option’s price is expected to move relative to changes in the underlying asset.

Gamma: A measure of how quickly an option’s delta changes as the price of the underlying asset moves.

Implied Volatility (IV): The market’s forecast of a stock’s expected price movement derived from option prices.

IV Crush: The sharp decline in implied volatility that typically occurs after a major event such as earnings, reducing option premiums.

Put Gamma: The gamma exposure associated with put options that can influence dealer hedging flows around key strike levels.

Settlement Day: The date when payment is exchanged for newly issued securities, such as Treasury auctions, impacting market liquidity.

T-bill: A short-term U.S. Treasury security with maturities typically ranging from a few days to one year.

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