Jan. 28th 2025 Option Outlook

Quite the selloff!

Good Morning! A massive selloff catalyzed by a foreign AI competitor. NVDA dropped 17%, and SPX dropped 1.6%.

While it was a scary, volatile drop, it highlights the problem of a lack of breadth. AI was a crowded trade, and all it took was a hint of a problem in that area to exasperate market risk. From a Volland standpoint, we held 5900 and were solidly overvixed. It was a borderline overvix signal, but in my estimation, we didn’t quite activate it because of the Monday effect. Will the scary drop continue?

One problem with getting too bullish in an environment like this one is that selloffs like this can have continuation and be scarier. We need to see structures like the weekly…

Now that’s support. Structures like this make it difficult to have continuation to the downside until you reach negative vanna. 5950 is the big strike that crosses into negative vanna on the weekly. If 5950 breaks, it would be a swift drop to the 5900- area, probably peek down to 5875. I’m not saying this will happen today, but if FOMC is unfavorable tomorrow, that is the downside plan. From 5875 I would expect strong overvixing. That would be needed to buy the dip. If there is no overvixing, we will continue to the downside until we do. On the upside, 6100 has popped up again as that consistent magnet. 6000 also has strong pull, but the structure above is showing that there is a strong bullish bias on the weekly. So I think we will hit 6100 at the latest by next week. If FOMC doesn’t cause a selloff, 6100 will probably be reached this week.