Founder’s Note:

Futures are flat ahead of CPI at 8:30AM.

Our main focus here is on vol: we continue to think the move over the next several sessions will be larger than the market estimates. This, after we yesterday had nearly 4 swings of 1% in the SPX.

That being said, today’s straddle is a lofty $65/1.1% (ref 5,845, IV 33.5%) – certainly a higher price than we’ve seen in recent memory and arguably not too cheap (and a major increase to the ~12% IV for the last CPI print).

However Friday’s SPX PM straddle is $94/1.6% with an IV of 22% – quite a discount to the 0DTE.

This pricing is reflected in SPX term structure, which is very backwardated as traders focus the 0DTE CPI hedge, while longer dated IV’s linger at much lower levels.

With vols elevated, a benign CPI should likely trigger a stab higher into the 5,950 – 6,000 range for Friday OPEX (+2%). This fuel is a combination of negative gamma above, and vanna (IV declining).

Its a deeper negative gamma structure to the downside, with our risk off trigger at 5,800. Below that level its likely that IV increases materially, into negative gamma with a large dealer short put at 5,700 (or initial downside target).

Additionally, if we are correct that about elevated vol-of-vol due to market underpricing movement/IV, then more directional fuel could be in play.

The movement out of the next several sessions plays into a 3-day weekend which, combined with OPEX, could prove to be a short term

pivot

 point for markets ahead of 1/29 FOMC & election season.