Macro Theme:

Founder’s Note:

Futures are +75bps, with CL -115 bps to 89.

After starting our note, ES is now +25bps with CL +20bps.

ORCL -9% after ER.

The dividing line is clear: 7,300. Below that level market makers have negative gamma, and we would anticipate an acceleration of downside if that level is re-broken. We certainly saw spades of that volatility escalation yesterday, and overnight as ES touched 7,240, with “on & off again” Iran headlines.

We would normally lower our Risk Pivot to be 7,300, however the positive gamma above that level, combined with headline risk, has us viewing this 7,300 level as generally unstable. Given this we have a neutral view of direction equity direction in the 7,300s, and want to be eyeing downside on a break <7,300.

Throw in trying to navigate the liquidity needs of SPACEX, which launches tomorrow.

There are many interesting happenings in the volatility space, too. 1-2 weeks ago we had nearly every major stock clustered to the right of our Compass map (green rectangle), which spoke to very rich call prices/skews. Now stocks are scattered i.e. “dispersed” across our the center of our map, which speaks to rich IV, but varying call vs put skews. This informs us that, generally speaking, equity IVs are pretty rich, but the “consensus call” positioning is gone. This is a better stance for bulls vs a week ago as calls are now less overbought – but in that same tone it can be a topping signal as traders transition from call-leaning to wanting downside protection. Over/under 7,300 SPX dictates our view on this bear vs bull signal for single stocks, too.

This all matters because the VIX signals Index vol has a mild premium, but its far from rich given how price action is whipping and the events we have ahead. Iran deal, solid SPCX IPO, and neutral Fed could easily allow a volatility slamming, which would push SPX back >7,500. But the vol isn’t rich enough to sell until there is some kind of clarity in these events – particularly the now-hot Iran situation. That inability to sell vol is stalling sustained upside, as “vanna flows” cannot be invoked.

To the downside, traders run the risk of throwing in the towel on this market which again sources back to over/under 7,300. Puts are not obviously expensive in this environment (i.e. VIX is now 20 vs say 40), particularly if Iran gets worse. So vol has “easy room” to expand if equities leak lower. The takeaway from this is that we are generally in wait-and-see mode, ahead of some massive catalysts.

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