Sep 20, 2021
[3 min Read]
I would like to share my metric with you guys. Its called VoEx, and I think it is showing us that the dip in SPY may continue.
VoEx is a measure of the price-directing forces on a stock. Usually theses forces provide either a balance to the stock, or are relatively negligable in their effects. However, occasionally they can cause a stock to become unstable and actually push a stock in various directions.
Since there are many price-directing agents in the market, VoEx was developed to encapsulate all of them, their effects, and then display it succintly on a graph! The first imagine is of SPY's VoEx.
VoEx-daily is magenta, VoEx-trend is tan, and the price is blue. There are also two horizontal lines: the top is known as the inhibition line, and the bottom is known as the propagation line. If VoEx is outside of either one of those lines, it is considered unstable, and conversely, if VoEx is held within those two lines, the stock is considered stable.
Over the past month or so you'll notice VoEx-trend was becoming increasingly proximal to the inhibitory line - a good way to think of this behavior is that there was increasing resistance to the prevailing trend. This trend, of course, was upwards. For instance, take a look at the market pre-2020: you'll notice that the market was incredible unstable, and without fail, the market was brought back down along with VoEx.
(As an aside: the common counter is: covid. This is true: but keep in mind, why would VoEx have been responsive to an unstable market months before Covid was known? Also - this trend holds true with the data pre-2020).
So, the concern here is that VoEx-trend has touched the propagation line, and considering the rate that it did so from its position at the inhibition line is worrisome. For isntance, you'll notice that last month, VoEx-daily (magenta) also went to the propagation line - but VoEx-trend stayed relatively near its position towards the inhibition line. This behavior is common around the end of the month. What is not common is VoEx-trend's behavior.
What's also interesting is if we look at how the options on SPY changed from Friday to Today, there were some odd changes in the setting of a decently negative day.
On Friday the 17th:
So there was a net change of:
It should be noted that the numbers included on Friday the 17ths do not include the options that were expiring on the 17th (they are removed if present).
So in sum we have:
So without directionalizing the options (doable but some quick math can suffice), this implies that the puts that were removed from the market were dealer long (thus, increasing the effective net negative delta). But even if we count the calls that were removed as also dealer long, and since there can at most be 1 delta per option, that leaves us with a delta deficit of: 2,992,980 short delta.
This implies that long delta positions were closed for short delta positions to the tune of almost 3 million short delta on SPY. That's pretty significant. Whether this was retail investor short calls switching to long or retail investor short puts switching to long puts; it's hard to say.
Looking to see how this net delta on SPY effects it price, we can look at two of the more significant determinants in what moves delta hedging: price and volatility. Picture 2 is the hedging matrix for SPY. The hedging matrix shows the number of shares that must be purchased or sold per point move in price and IV.
We see that for every point decrase and IV increase, those who delta hedge must sell 11,457,768 shares. Since today saw a 7 point price depreciation and a 5 point increase in IV this equates to: 137,493,216 shares that must be sold.
Therefore, I think SPY is at significant risk for further price depreciation!
Also, as an aside: to get a gist of how much SPY's recent price movement has exceeded the market's expectations, image 3 is the expected price range graph. It shows the price (black) against the market's price range expectation (blue lines). Obviously SPY has plummeted through the bottom line.