Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 10 bps, with Oil over 103. The VIX remains <18.

FOMC day is today, with earnings from: GOOGL, MSFT, META and AMZN.

The TRACE map shows us market makers are long gamma across the 6,900-7,300 range. Albeit the area between 7,000 and 7,200 is much more mild, and a sharp statement from Powell could allow for this area to shift to a localized negative gamma zone if traders elect to buy options (making MM’s short).

The sum of all this is that traders are short options (MM’s long), and no one is positioned for volatility. To that point, today’s 0DTE straddle is just 50bps (ref 7,145) – it is FOMC day…right?

We are not going to go on about the risks embedded in this ultra-low pricing, you can view yesterday’s note for that. Before we move on, we note what appears to be Captain Condor, with a ~3k 0DTE condor at 7,200 & 7,060. A 3k lot position is only a 98th %’ile strike, which is enough to show up as the largest gamma strikes on the 0DTE board. This is more of a reflection of a real lack of size out there pre-FOMC vs Captain being meaningful.

Ultimately, we see the SPX as safe/stable as long as it remains above our Risk

Pivot,

at 7,090. This does, though, appear to be a turning point for the market.

To be clear, tomorrow’s SPX straddle is at $75, which is quite elevated at 104bps. This suggests maybe more that its the Mags that matter, instead of FOMC. You see the peak in the SPX term structure, highlighting the high relative IV for tomorrow. Given this IV difference, its clear that the market is expecting “something” to happen now: either FOMC & earnings clear a path for more unlimited upside, or we correct. Again, 7,090 is our barometer for bear/bull.

Turning to earnings: Last night STX crushed it, and the stock is up 17% this AM. That certainly helps keep the focus on AI vs geopolitics.

The Mag’s reporting tonight all price in a ~6% move, as you can see below.

The stocks all have 1) very high ER IVs, and 2) a clear call-tilt to them, as you can see in Compass. Traders expect great things, and historically buying calls at these prices is not a great idea. It’s hard to argue that this earnings period has been an exception to that rule, as evidenced by STX.

Focusing on MSFT, you can see the call wing is bid. The 1-month 25 delta calls trade at an IV of ~40%, which implies a ~11% move is expected over the next month. Really what this is saying, most extremely in MSFT but writ-large for tonight, is that “we think these stocks are sharply underpriced”. We don’t know how true that is, we just know that “in line” to “okay” is likely not enough for these calls to pay, and so the risk is this call skew flattens out and puts a damper on these Mag names.

This is not an advertisement from SpotGamma to short these names, but it is a suggestion that these call prices are likely to start throttling upside unless we get blowouts. Shown below is YTD performance, with these current levels being at or within a few percent of all time highs. MSFT is the clear laggard, and it does read like traders are betting that the gap is closed based on the Compass map, and MSFT sporting the richest call wing.

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