Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are off 25 bps with no major data on tap for today.

VIX expiration seemed to allow for a quick 1% rally yesterday AM – a rally that stopped dead at 6,900. At 6,900 we saw heavy S&P call selling (see the PM note), which finally broke the market into the mid-afternoon, pushing the SPX back to 6,860. For SPX, it was ultimately “nothing done” on the day.

6,860 is where we stand this AM, with positive gamma >=6,900. Given this we are still marking 6,900 as the Risk Pivot, as under 6,900 there remains a soft underbelly, with negative gamma and the specter of implied vol spiking.

There is also a very interesting dynamic forming in single stocks: uniformly high put skews. You see this as the clustering of all the top stocks in the bottom left of the Compass chart. Critical here is that IV’s are warming but not yet spiked. “Spiked” would make the prospect of selling vol a bit more interesting…

The above chart uses Risk Reversal logic on the x axis, which shows the 1-month 25 delta put IV vs the 25 delta call IV. So stocks can slide to the left on this chart if put IV is high relative high, and/or if call IV is low. Said another way, maybe risk reversal is just low because traders are slamming call skew, not really bidding puts.

To provide some answers, we break Compass into Call Skew %’ile (x) vs Put Skew %’ile (y). Here we see that names are almost all exactly at the top left: put skew %’iles are +90 (!!!) and call skews are all <25. Traders are selling calls, and buying puts…this is a distinct belief in lack of upside. Its not entirely clear if this is due to systematic flows (the nefarious dispersion trade), or fundamentals (hedging, downside speculation) – but its uniform.

This brings up a critical question: SPX is just ~1.5% from all-time highs and has been digesting the same 6,800-7,000 (~3.5%) range since Thanksgiving – so now why are single stock puts so bid? And, if many of these stocks are down 20% from Jan highs…why are calls still being sold?

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