The market's stabilizing "shock absorber" has been significantly reduced following the July options expiration (OPEX), raising the risk that the recent correction in AI-related trades, previously confined to the semiconductor sector, could spread more broadly.

Last week, a series of supportive factors bolstered the market, including lower-than-expected inflation data, strong bank earnings, better-than-anticipated retail sales, and optimistic outlooks on semiconductor demand from ASML and TSMC. However, the release of the domestic AI model Kimi-3 on Friday triggered a broad decline in global chip stocks, putting pressure on the S&P 500. Analysis from SpotGamma indicates that the market's overall stability last week—including the rebound on Friday morning—was largely underpinned by positive gamma dynamics, where options market makers dampened price volatility through contrarian trading.

With the July OPEX concluded, this stabilizing mechanism has largely dissipated. Against this backdrop, the current earnings season will become the market's primary driver, with the performance of tech giants like Alphabet and Tesla set to be tested in a more volatile environment.

Positive Gamma Fades, Market Buffer Withdraws

According to SpotGamma's Synthetic Open Interest Model, market makers' gamma exposure has shifted notably lower post-July OPEX. In the firm's gamma exposure chart, the purple line representing total gamma levels before Friday's expiration and the yellow line showing post-expiration levels clearly illustrate the significant reduction in this market protection layer.

In a positive gamma environment, options market makers tend to act contrarily—buying during market declines and selling during rallies—creating a natural mean-reverting force that suppresses large price swings. As this mechanism weakens, the market becomes more sensitive to directional capital flows, and the magnitude of price movements is likely to amplify.

SpotGamma notes that the post-OPEX landscape points to a core question: will the reduction in positive gamma allow the sell-off, previously contained within the semiconductor sector, to ultimately spill over into the broader market?

Semiconductors Under Pressure, Sector Rotation Supports Market Resilience

A rotation of capital within the market has been unfolding over the past month.

Traders have been steadily exiting the semiconductor sector and reallocating into the "Magnificent Seven," software, and healthcare sectors. This trend has dragged the Semiconductor ETF (SMH) down to a level roughly 20% below its all-time high.

Nevertheless, the boost from inflows into other sectors has allowed the S&P 500 index to demonstrate considerable overall resilience. It is precisely this internal divergence—with some sectors falling while others rise—that, in conjunction with positive gamma, has enabled the broader market to maintain stability.

SpotGamma has previously analyzed the widening volatility divergence between the S&P 500 and the Nasdaq.

From the perspectives of both realized and implied volatility, the S&P 500 currently exhibits a stronger capacity to absorb dispersion among its component stocks. However, the firm warns that current dispersion metrics are at extreme levels, suggesting that upcoming catalysts could trigger an outsized volatility spike.

Earnings Season Takes the Baton, Key Levels Become Pivotal

The macroeconomic calendar is relatively light in the coming week, shifting the market's focus entirely to the earnings season. SpotGamma measures implied earnings volatility using the at-the-money straddle for the first expiration date to estimate the market's expected reaction to earnings events.

This Wednesday, two Magnificent Seven members, Alphabet and Tesla, are scheduled to report, with both carrying implied earnings moves of approximately 6%. Additionally, several semiconductor and software companies, including Texas Instruments (implied move 9%), Intel (implied move 13%), and ServiceNow (implied move 11%), will also report this week.

SpotGamma points out that single-stock implied volatility for major market names remains elevated. Given the significant roll-off of index-level positive gamma post-OPEX, the potential for earnings reactions to transmit to the broader market has increased notably.

Regarding key technical levels for the S&P 500, resistance levels are seen at 7,500, 7,520, and 7,600 points. The 7,480 level acts as a pivot (bearish below, bullish above), with support levels at 7,480 and 7,400 points.