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The Flip: A Transitional Strike

The Flip is a transitional strike where we anticipate a change in dealer hedging and subsequently a change in the volatility regime. It serves as a marker to determine market control and favored strategies: 'buy the dip' or 'sell the rip’.

The Flip differs from the Zero Gamma level in the fact that Zero Gamma only considers Gamma, whereas the Flip considers Vanna (volatility) and Charm (time). Both Vanna and Charm also impact delta and, consequently, dealer hedging. The Flip is much more sensitive than Zero Gamma proving an early signal of change in control.

When price is above the Flip, it signifies a call-dominated market (positive gamma), prompting dealers to hedge by buying weakness and selling strength, supporting the 'buy the dip' strategy.

Conversely, when the price is below the Flip, it indicates a put-dominated market (negative gamma) prompting dealers to hedge by selling weakness and buying strength, supporting the 'sell the rip' strategy.

This metric is available for both the SPX and SPY, and their positions often differ. We generally recommend giving more weight to the SPX Flip; however, they can be used in tandem to offer deeper insight into the control dynamics. When the price is above both Flips, it indicates a strong call-dominated market. Conversely, if the price is below both Flips, it indicates a strong put-dominated market. However, when the gamma leans toward neutrality (Zero Gamma) rather than showing a significant imbalance, the SPX may trade between the Flips, indicating a lack of control.

The Flip also serves as a strong support/resistance level, and is often associated with marking intraday highs and lows. Trades off the Flip level are generally regarded as a high probability setup. 

A break below the Flip intraday indicates bearishness and is typically associated with a spike in volatility (VIX up), followed by a strong downward move in the S&P 500.  This signals a short-term 'risk-off' situation, suggesting a potential pause in dip-buying activities. Generally, but not always, the market requires a negative catalyst to break and close below the Flip.

Conversely, a break above the Flip intraday indicates bullishness and is usually linked with a decrease in volatility (VIX down), followed by a strong upward move (squeeze) in the S&P 500. 

In summary, it is generally more attractive to buy dips above the Flip and sell rips below the Flip.

If there's a single level worth focusing on, it ought to be this one.


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