Macro Theme:

SG Summary:

Update 10/31: Yesterday’s meager 1% decline started to ease the \”risk alert\” positioning we flagged on 10/29, with call skews shifting to \”rich\” vs \”screaming overbought\”. Thats good news for bulls, as we think there is less spasm risk (a la 10/10). On the flip side, we are not seeing any obvious long opportunities, either. Bottom line: We hold the VIX call spread hedges we bought earlier this week, but with a close back >6.900 we’re back into a risk-on stance.

10/29: RISK ALERT – COR1M and the over-bid Index calls have us quite nervous at these levels. Given that we are going to be rolling up call positions, and adding to downside protection. The trick is maintaining long exposure while legging into some ~1-month protection. We will look to get more aggressive if/when downside starts to flare.

10/27: We are going to be monetizing/rolling our longs from the last week, and add some VIX call spreads due to the decline in COR1M to <8. The key here is to maintain long exposure, but also hedge out 10/10/25-like spasm risks that have snuck back in. We also raise our bull/bear Pivot to 6,800, from 6,700.

Key SG levels for the SPX are:

• Resistance: 6,900, 6,950, 7,000

• Pivot: 6,900 (bearish <, bullish >)

• Support: 6,800, 6,700

 

Founder’s Note:

Price action looks set to remain fluid while the SPX is <=6,900. You can see this via the negative SPX GEX marked below, and also in the red TRACE map. For this reason we remain neutral while SPX is <6,900, and shift to bullish above that strike.

What appears to be happening is a bid for volatility, which we interpret as downside hedging through SPX puts and VIX calls. This is evident in the rise of VVIX relative to VIX, with VIX itself also increasing.

If we look at the change in SPX vols from 10/27 (pre-FOMC + US/China meeting + Mag 7 ER’s), we see they are higher across the board, despite the fact that these events should have chunked IV lower. We observe that strikes at 7000 are essentially flat, which contradicts the narrative that upside call chasing remains a significant dynamic.. The takeaway here is that we went into these events with a big call chase on (which resulted in very rich call skews), and that call skew is drying up. The second one is that clearly some downside hedging is in play as downside strikes are bid into the face of declining event vol.

This vol bid could be related to several items including the shutdown, elections, Fed rhetoric (rates are higher post-FOMC), or some other dynamic – the point we need to be aware of here is that the soft underbelly to this market exists while SPX <6,900.

The challenge here is that if SPX 6,900 is recovered, we can see vols contract, and because calls are cheaper now then we can make an argument for a strong pop to 7,000. You can see “cheaper” QQQ/SPY call skews have flattened via Compass, and we also note the big move lower in TLT as trader have lost their bullish view on bonds post-FOMC.

So, what’s the trade?

Unfortunately we are in no-mans land.

We went into 10/27 monetizing equity calls, and sought to add some “spasm protection” due to ultra-low COR1M and very rich call skews. Call skews have dropped meaningfully since then, as we moved through Mag 7 earnings, and a ~1% SPX decline. 1% is hardly something to write home about, but the vols resetting does take off some of the 10/10-like vol pressure off. This leaves us with SPX prices that are surrounded by negative gamma (if there was big positive gamma below we’d be happier buyers, currently thats ~6,700), and vols that are elevated, but not obviously rich nor cheap.