Macro Theme:

 

 

Founder’s Note:

Futures are +60bps. There is little changed in overall market structure from the last few weeks, with support at 5,800 & resistance at 5,850.

The prime feature of this market structure is positive gamma strikes, as can be seen from ~5,775 all the way up through 5,900. In this zone, positive gamma provides dealers with hedging flows dedicated to buying market declines and selling rallies.

The second thing of note is that there is no real zone of negative dealer gamma, implying that volatility should remain contained even if there is a mild decline in equity prices. In fact, our data suggests that negative gamma is not currently a factor unless the SPX breaks <5,550.

It would take active put buyers to change the current hedging profile – something that is unlikely to come unless a risk trigger is realized (not rumored).

Based on current positioning, we see little for change until elections & FOMC 11/5-11/7. You can see this in the Fixed Strike Matrix, which shows statistically elevated vol for that time frame. This vol structure, like the prevailing 5,800-5,850 trading range, is nothing new. This leads to what is likely to be a fairly dull trading week.

One of our core views has been that the benign passing of elections & FOMC could lead to a contraction in event-volatility. This contraction could reflexively lead to a lift in markets, as the decline in implied event-

volatility triggers

equity buying.

That buying would be an aside from…FOMO.

We’ve been highlighting that the way to play possible year-end upside may be with Dec or Jan calls, as they are statistically cheap (see Friday’s note).

TSLA was included in this “statistically cheap” category early last week, until positive earnings forced a violent repricing of the stock. That repricing was driven by >3.3mm TSLA calls trading last Thursday – the 3rd highest volume in history. FOMO.

Accordingly, we saw Jan TSLA call skew pump, as shown by Friday’s closing skew (teal) vs last Monday (gray).

While we don’t think that suddenly all stocks see similar manic call buying, even strong call buying in the likes of NVDA or even QQQ could lead to dealers having to chase equities higher. While there is no way to know for sure how stocks will perform post election/FOMC, these 2-3 month call prices seem like a reasonable, fixed risk way to gain upside exposure.