Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are +30bps ahead of 9:30AM ET VIX expiration and NVDA ER at the close.

Watch for unusual ES movements around the cash open due to VIX expiration.

TLDR: Vols, both index & NVDA are not too rich, nor too cheap to weight the outcome of tonights events. We do, however, think today triggers a fairly long directional trend into end-of-November allowing for a “wait and see” approach. Ultimately our best case for upside over the next few weeks is 7,000, with VIX returning to ~16. Downside we watch VIX 30 and 6,500 as first downside stop, with 6,350 being a larger “wash out” level.

Below we assign the event vol for VIX exp as ~1 vol point, and NVDA ~2 vol points, implying that the benign passing of these events should reduce very short dated SPX vols by a total of ~3 points. We’d note that 2-3 vol points is sizable for a single stock earnings event, indicating its truly important for equities as a whole. SPX gamma is also negative across the board, backing a wide range of movement today and into tomorrow.

In this case, should NVDA earnings pass without issue we’ll likely see a substantial equity rally, which would reduce volatility much more, particularly into next weeks holiday (Thu market closed, Fri 1/2 session).

A miss obviously works the other way, as it likely boosts the negative narrative around AI growth. We would start to eye VIX 30, and SPX into 6,500 as the outcome to that situation.

NVDA’s implied earnings move is ~6.6% which is pretty average. Further, the skews are all fairly average, too, indicating there isn’t a strong positional lean into tonights earnings. You see this in Compass wherein NVDA is perfectly centered: IV Rank 50%, Risk Reversal 50%.

The stock is also down ~12% this month, and ~4% this week (1-month realized vol RV = 43%), lending the impression that this 1-month IV of 53% isn’t a home run in terms of vol collapse/IV earnings crush. If we think about the reflexive flows from NVDA earnings, we can make the case that NVDA vols are maybe even a bit cheap as NVDA moves the AI names which are 35% of SPX/NDX, and as SPX/NDX move they add to NVDA movement.

What we instead think is more interesting is broken wing call flies in the SPY/QQQ or even SMH to play upside, with the idea that positive NVDA news generates a large initial move, then vol contracts sharply into Friday.

Additionally, CRWV and ORCL may provide for interesting trades, as they are heavily dependent on this NVDA outcome. In the case of CRWV the stock is already down ~50% this month, but near term puts flag as not fairly expensive. The tiny puts seem to be bid up, though, and so put flies could be interesting downside plays there as near-the-money puts scan as relatively cheap relative to wings.

Lastly, with ORCL, they report on 12/15, so >=1-month vols are pricing in both NVDA ER + ORCL ER, additionally ORCL is -20% this month. This results in an IV rank near 100%, with traders actually leaning into calls (see above).

This presents an interesting opportunity in that >=12/15 dated options ORCL may be more stable out of this event (for long options plays), and pre-12/15 options are more of a pure-play on NVDA earnings.

To visualize this, you see the ORCL term structure below with short dated forward implied vol below that of Nov options (implying vol crush ahead), while Dec Options forward implied vol is above the term structure (we wouldn’t expect much Dec vol crush). Calendar spreads or diagonals may be interesting here as a result, particularly on the put wing. Recall too that the ORCL IV rank is near 100%, with a skew to calls and so positive NVDA earnings could bring that Dec exp vol in a bit, making it interesting for call flies with that idea that great NVDA earnings brings some ORCL relief.

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