Nasdaq Pulling Back To Major Option Inflection Point, Potential Volatility Ahead

While the US markets are down mildly on the day, the Nasdaq ETF Invesco QQQ Trust QQQ is only a couple of points from a major options inflection point.

What Happened: The Nasdaq ETF QQQ is approaching the $400 strike, which is critical because it represents the zero gamma point for the ETF. The zero gamma point is where the estimated gamma of the market flips from positive to negative. 

Positive gamma is when the market is overall net long options, while negative gamma is when the market is net short options.

Why This Matters: When the markets are in positive gamma (net long options), volatility tends to be lower and the option market makers tend to provide liquidity and stabilizing flows to the ETF. 

However, when the market is in negative gamma (net short options), volatility tends to increase with market makers taking liquidity and destabilizing the movements.

Below is a graph of the S&P 500 ETF SPY showing how the volatility changes between positive and negative gamma (image below, source: option metrics)

When the market opened today, the Nasdaq QQQ ETF was in mildly positive gamma territory, with the estimated gamma exposure around $185 million (notional). Today's movements have been characteristic of that positive gamma environment, with volatility being low.

What's Next: As long as the QQQ's can hold the $400 level on a daily closing basis, dips will likely be bought, but upside resistance should appear around the $408 and $410 strikes for the week.

If, however, the QQQ's has a daily close below the $400 strike, this could increase volatility. Combine that with a solid option expiry to end the week, and next week could see an increase in volatility.

For now, the index ETF looks supported while above the $400 strike, but it should be noted option traders are buying protection on the day with over 571,000 puts traded versus approximately 460,000 calls (image below).

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