Macro Theme:

 

 

Founder’s Note:

Futures are flat ahead of NFP at 8:30AM ET.

Resistance is at 6,100 & 6,112, support is at 6,055 & 6,000.

Today’s 0DTE straddle is $27.5 or 45bps (ref 6,075, IV 17.4%) – RICH compared to yesterday’s ~5 year low of 28 bps, but hardly a mark of market concern.

We are in the “don’t want be short vol” camp (due to these low IV’s & poor risk/reward), but should NFP be at or better than expectations then its likely short-dated vol contracts, particularly ahead of a weekend, which likely moves the S&P up into 6,100.

Attention from NFP likely shifts immediately to 12/11 CPI, where we’ll be repeating the above statement (i.e. “odds are there is a small event-vol contraction”). The risk here is that if either of these data points print with a negative tail, we could see a sharper than expected reaction (i.e. jump risk) due to the low volatility expectations. Additionally, our intuition here is that if you are short vol you are likely not to be compensated much due to IV’s near 10% (ex: collecting theta on cheap options isn’t so exciting).

This highlights a key point: just because we don’t want to be short vol does not necessarily mean we want to be long. We did yesterday say that buying puts could start to make sense, and we have been adding very short dated collars to our core SPY position as skew has made them favorable, and we like the idea of “only a bit of grind” ahead for SPX. But we don’t yet have a material reason to think a sustained vol move is at hand (we need Dec OPEX and/or SPX <6,000).

Plus, this is adding puts after excellent equity returns over the past month, into IV’s that are nearing lows (IV cant go negative). So, adding a bit of insurance, even just for a short term correction, is very low-cost into stretched all-time market highs.

Having said all that – here is the rub: December almost always tends to feature local lows in volatility. You can see this in the VIX chart below, wherein we highlighted the time frame around Dec OPEX.

This suggests that we have nothing to materially worry about for the next few weeks, and from our seat we don’t see a concrete volatility catalyst until the massive Dec OPEX (12/20). Dec OPEX should result in the removal of a lot of this gamma that is helping to pin equities down.

Therefore, until then we are looking to buy dips in equities, and will operate with that stance until either Dec OPEX, and/or the SPX <6,000. Below 6,000 these positive gamma dynamics flip to a mild negative gamma position, which equates to “risk off”.