Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are 50bps higher as we enter Xmas week.

As we have been emphasizing for at least a week, we see the holiday period here as offering a bullish tailwind after a huge OPEX, and with Xmas/Xmas Eve shortening the week. This should allow short-dated vol sellers to step up, which buoys equities.

Gamma from 0DTE options appears to be positive from the big Condor strike(s) at 6,865, which is support for today. You can see the top call spread of that 0DTE Condor strikes in the map below (large vertical bars). More critically, we see that gamma appears to be positive for SPX prices >6,850 (solid curved line), however most of that is supplied by 0DTE. If you remove 0DTE, you see that the gamma is only really positive if the SPX moves >6,900 (dashed line). Further, the only real supply of non-0DTE gamma is from the JPM strike, which is at 7,000 for 12/31 OPEX.

The distinction here is that if the SPX was more in the area of non-0DTE gamma then we’d think SPX price ranges would contract (i.e. less volatility). As the 0DTE flow is transient, it allows for a bit more movement. This means to us that the 7k strike is still in play possibly for this week, but certainly into 12/31.

Pivot

ing to the vol landscape, we pointed out last week the lack of bid for downside protection (as seen in VVIX, etc), and that narrative was picked up in recent bank research notes and is now common knowledge. That implies that everyone is on the same page in terms of “lack of fear”. We see lack of fear manifesting in SPX term structure, which sees this week’s IV sinking into the 8’s. This week’s IV’s probably sniffs 7’s. Note Jan is relatively higher at 12%, and that probably sticks. This highlights the key dynamics of price & time: equities are supported by the holiday and by the JPM strike which suppresses vol, particularly at higher strikes. After this week, those same supportive forces are not aligned, which, we think, makes equities more susceptible to downside into possibly next week + Jan.

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