Macro Theme:

Key dates ahead:

Founder’s Note:

ES is off 75 bps, NQ -160bps. CL +2% to $80.

OPEX is today, which may loosen up the volatility of the SPX. AI-related stocks have been crumbling dragging down the Nasdaq. That pressure continues today with the release of Kimi-3 which is showing Fable-like capabilities. We remind people that news matters more when vol spreads are whacked out.

This is also such a strange period because we have been rather loudly warning of a market correction, and major components of the equity market are certainly down sharply. At the same tech, Nasdaq is lower, a bit, while SPX has been essentially flat. Essentially its all the stuff that outperformed the last 2 months mean reverting, and the SPX, which was “up the least” is “last to (possibly) drop”.

On this topic, we project that SPX positive gamma will be removed with todays OPEX (purple = today GEX, vs Monday in green). Obviously positions will be added/rolled with todays OPEX, but our projection is that the <7,480 Risk Pivot marks a deterministic area of negative gamma.

“Does OPEX matter”? We’d argue that the positive gamma seen in top single stocks (mainly mag7) and SPX has created “buy the dip, sell the rip” price action. Below is a chart of autocorrelation in SPX 30 minute returns. Its attempt to measure if price action in the SPX mean reverts, or trends on an intraday basis. Large negative autocorrelation = mean reverting markets. High autocorrelation = trend.

The thing we notice here is the cyclicality of this feature. You can see there is a wave (sinusoid) which suggests the price action of the SPX shifts from mean reversion -> trending ->mean reversion over time. We marked OPEX with yellow, and you can see that OPEX is often a moment that the trend changes. What you see here at this moment is a deep, mean reverting market into OPEX. The implication here is that we may start to see larger directional moves in the SPX now – moves that don’t mean revert.

How to play? <7,480 we will look to press downside SPX plays. We continue to like rolling cheap <=5 DTE put flies in SPY/QQQ/IWM. Also, we like put ratios in the “tanking tech” like DRAM, EWY, SKHY, MUC, etc.

Here is a rough example of a SKHY 1×2 which seeks to be flattish delta and short vega. The idea is that these stocks all had massive “stock up, vol up” moves, and as they mean revert, that vol is staying stable. If/when these stocks bottom, the vol should come in sharply, which crushes the 2 short puts. Do not use his specific example as we quickly put it together – you want to play with different tenors and strike positioning.

We adjusted the vol skew down here to show how the PNL improves if/when vol declines (purple) vs keeping current skews (yellow).

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