Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 50bps, with oil (CL) -3.5% due to some Iran headlines.

CPI at 8:30AM EST. The market is pricing in a 69% chance of a hike next week.

The SPX 0DTE straddle is at $52/68bps (ref 7,630). That is relatively rich compared to previous trading days, but at 68bps this market is not too terribly stressed about today’s print.

Yesterday we highlighted that the risk line from 7,600, and that remains the case. We currently project that through next week negative gamma lies <7,600. <7,600 was tested yesterday AM, when well-timed positive oil headlines and 0DTE came in to offer support (see PM note). A hot CPI may push the SPX below this level today, and unless there is a clear pause in conflicts we do not think traders will want to be short of vol over this weekend – particularly will next weeks events keeping vol primed. Given this dynamic, a knee-jerk positive CPI reaction into ~7,675 is certainly possible, but a more sustained rally fuel is not likely in place (due to vols).

This weekend may hold more risk than normal given the weekend and the flaring of Iran tensions, with the SPX dancing just above a large pocket of negative gamma. Tread lightly.

Yesterday we talked about how the equity market is being dragged by oil prices, and then a hot PPI was dropped. With that we saw the US 10Y touch 4.98% intraday which is the highest since Oct ’23. Rates pulled back a few bps this AM due to oil, with CPI adding another catalyst this AM.

We also flagged signs of traders starting to hedge downside in stocks, and upside in oil. That theme continued yesterday with stocks moving more “upper left” on Compass (red arrow) – a sign of higher IV and steeper puts. Oil (USO, green arrow) kept working to the opposite direction, which is a sign of higher IV and a steepening call skew.

There is one sector which is getting quite interesting from a vol perspective: tech. SMH IV is below, and as you can see it has mean-reverted to a long term mean. We think that over the next week tech and SMH will really start to move – either lower on macro concerns (stock down, vol up) or it will get some positive data and start to chase mid term upside (stock up, vol up). For dynamic hedgers, this is a decent enough idea as you can monetize a straddle or other long structure by hedging. For us more in the retail community we like owning SMH options with the idea of November upside structures and/or shorter dated downside put structures.

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