What Vanna Is Telling Us About Markets In June: A Look At SPX, SPY, and QQQ Hedging Requirements

What Is Vanna, And What Can It Tell Us About Markets?

Vanna is the relationship between an option's delta (the number of underlying shares a dealer must hedge for the derivative position) and its implied volatility.

When deducing a dealer's vanna position, you learn how fluctuations in implied volatility can affect their hedging. Therefore, you can understand buying and selling pressure from a large source of market flows.

Let's examine vanna hedging requirements for June in S&P 500 INDEX (^SPX), SPDR S&P 500 ETF Trust SPY, and Invesco QQQ Trust QQQ.

SPX June Vanna Chart

Image via https://www.vol.land by Wizard of Ops.

Looking at the June vanna chart, there is plenty of hedging starting at SPX 4000 down to SPX 3860. That means that if there is an event that causes implied volatility expansion (i.e., a debt ceiling crisis), these would be targets for downside. However, if nothing happens and markets cannot drop past 4000, markets will slowly advance again, possibly to the 4300 SPX area.

SPY June Vanna Chart

Image via https://www.vol.land by Wizard of Ops.

Looking at lower option volume ETFs, SPY shows a similar picture with the largest vanna strike at 385. This is one of the rare times that SPY and SPX have similar dealer positioning profiles. Because SPY has 60% of the average daily notional option volume of SPX, that adds fuel to either a downside implied volatility expansion or a time-decay rally into June options expiration.

QQQ June Vanna Chart

Image via https://www.vol.land by Wizard of Ops.

QQQ has a similar setup, except there is a positive vanna spike above price as well. This establishes a possible target at 350 QQQ. The positive vanna spike to the downside is 290.

What Vanna is Telling Us About Markets in June

As a result, all else being equal, markets should see a slow, positive grind this option month. If there is a vol-expanding risk catalyst, downside targets are very clear at SPX 3850, SPY 385, and QQQ 290.

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