Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are +50bps ahead of 8:30 AM PPI.

Ahead of PPI today’s 0DTE straddle is a luke-warm $43/73bps (ref 5,865 IV 26.6%).

Resistance: 5,910, 5,950

Support: 5,800, 5,740

Rallies are likely not stable until/unless 5,975 is recovered

Risk Off/Short <5,800 due to large puts into 5,700

There is not a clear reason for the overnight market rally, but it happens into a space of negative gamma which can exacerbate movement. This means recent gains are subject to violent reversals, as we’ve seen several times over the last few weeks.

Accordingly, we could rally/sell off of PPI (today), and then sell/rally off of CPI (tomorrow), with >1% swings easily achievable.

In yesterday’s Note & Q&A we discussed the laggy implied volatility, which seems to be trading at a discount. The CBOE just put out a piece highlighting the same point, with the key column in red. This shows that implied vol is trading below realized for the SPX & Nasdaq. We broadly think this is incorrect, as we are in a negative gamma regime with plenty of catalysts in the coming days.

This stance is obvious to have if equities spill lower, as IV/VIX would surely spike. However, in the short term, we think its true (i.e. volatility is more elevated than mkt forecasts) to the upside too – at least until/unless SPX 6,000 is recaptured.

To boot, there was an interesting note from Nomura showing that historically realized vol tends to contract into earnings season, as focus shifts to single stocks (top chart). However, that is not true of January earnings season(s) (second chart), wherein realized vol tends to expand into earnings season.

This supports the the idea of betting on continued, elevated market movement vs vol contraction.