Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 50bps, which is +1.3% off of overnight lows. Oil (CL) hit 103, before retreating to 101. VIX at 30.5 is near overnight highs.

TLDR: If SPX holds 6,400 into the open, we think the chance of a +1% rally is strong. A loss of 6,400 likely opens the door for VIX to “go convex”. Given this, we like 0 – 1 DTE call flies which benefit if the SPX rallies >6,475. Downside positioning lightened up Friday, and puts are currently quite expensive. Given that, we find shorting here a bit difficult as buying expensive options is generally a no-no. Should we get a market rally here off of JPM 6,475, we’d view that as a great re-shorting opportunity.

The big strike now permeating the financialsphere is the 6,475 JPM strike expiring tomorrow. Futures are still about 1% under that level, but the overnight equity futures +1.3% bounce off of the lows starts to drive momentum now up to that strike, and it seems like dealers have to buy stock in order to keep up with the large negative gamma tied to 6,475. We quote “artificial” because we have $2bn of gamma at that strike which rapidly shift to about $4bn of gamma tied to the +30k contracts expiring tomorrow at 6,475. This creates “artificial” bidding in this market, and you almost hear the chorus of “How can the market be rallying given Iran blah blah blah…..“.

Given this strike is still one percent away, we like call flies for today and tomorrow into that strike, which benefit if the SPX moves in the 6,475 – 6,500 zone.

JPM aside, we have been of the view that oil >100 was a serious risk off flag for equity markets, as the VIX would likely start to “go convex”. Oil did indeed break that 100 level overnight, but Trump is out tweeting moments ago about “serious negotiations”. You can see below the link between CL (candles) and VIX, and we continue to believe that this market will ultimately go lower (and VIX higher) as oil goes higher. We reiterate this because the next paragraph can be framed as mildly bullish…

Should the SPX rally today and tomorrow, but CL remains >100, we think it would be a very strong opportunity to re-short. What is interesting here is that it looks like a fair number of SPX puts were closed up on Friday, as the downside negative gamma was sharply reduced. We can see this as the SPX gamma from 6,400 into 6,000 was a $1-2 billion dollars lower/more negative than it is today. You can also see how much of the current negative gamma ties to the 6,475 strike (its the biggest negative bar). Our read here is that, again JPM aside, put-buyers need to “re-up”, as downside flows look a bit limited which suggests a loss of momentum to into lower SPX prices.

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