Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are -10bps after yesterday’s strong rally.

GOOGL +5% after earnings to 167

All the chatter yesterday was “Is the selling really over???”

Its not hard to understand why nearly all investors are bearish given the US political stance of imposing tariffs and informing us that the US economy may hit a “speed bump”. Put all that macro aside for a moment…

From an options perspective, for the US equity rally to lose steam we need to see options-induced resistance (gamma) and/or signs that options prices are shifting towards a bearish tone (vol/skew).

Looking at the SPX gamma landscape via TRACE we see the massive +25k Captain Condor at 5,545 above & 5410 below (see last nights note on CC) – but thats 0DTE. Outside of that is, quite frankly, nothing.

Our thesis has been dealer positive gamma would fill in on sharp market rallies, and this morning we just don’t see that. There is also little to the downside, until we get to 4,800 wherein large positive gamma puts still exist. Through this lens, past today’s big condor strikes (which we look to play as targets for today) there is no real edge to extract from this positioning.

If you look at SPY gamma positioning, its quite large, and very negative. As you can see from the SGOI curve below, peak negative gamma is at 545, and that negative gamma pressure tails off into SPY 475 to the downside, and not until ~600 to the upside. Thats not bullish or bearish – it is conducive to fluid price action through to and above what we’ve called “no mans land”: the 500->580 range.

What about vol?

Starting with skew, we’ve compared 1-month skew from last week (gray) to today (teal). Last week was the most recent time the SPX neared the 5,500 area (into VIX exp/OPEX).

What is interesting is the put skew has declined at exactly the area wherein we mark large dealer positive gamma (~4800), and we now see a small lift to call skew >=5,600, which reads like a relative call bid.

This is a bullish development, signaling the repricing of upside vs downside.

But here is where things hit a snag…

>=1week ATM IV for the SPX is ~25%, with the VIX at 27, and SPX 5-10 day realized vol in the 25% area. This tells us that implied vols are too cheap, because IV/VIX at 25-27 is simply matching the amount of movement the SPX has been experiencing. This doesn’t account for any unknown related to a policy tweet, upcoming data points (earnings, NFP, ISM, etc). In order to justify lower IV in the future, you would generally need to see a removal of the known unknown (tariffs).

Its possible the market is sniffing out some deals, and that is leading to the decline in volatility. But the risk with this low IV is that if a bad tweet or headline fires across the wires, then IV’s have to “untwist” as call IV would decline and put IV rises. This downside would occur into the SPX flat/SPY negative gamma construct, which would allow/provide a sharp downside move (3-5%).

So, whats the trade?

We do not want to be short stock/delta here, because there quite frankly is no reason to be. If anything the strong equity options flow last night, combined with the call skew bid is a win for bulls.

That being said we think buying ~1-month puts and or put spreads makes a ton of sense given the lower prices, and the SPX rally into what has been a strong resistance zone (5,450) and the cheapening vol. This is a “great risk reward” trade as opposed to “the market has to crash from here” type view.

If you want to play further price upside, we can’t fault that, but you have to be weary of the fact that call skew will likely contract into further rallies. Given that, we recommend call spreads vs long calls. To be clear, we remain short of +1 month OTM calls from Wednesday’s big market rally. If/when traders start selling puts into near-the-money SPX prices (i.e. supplying positive gamma), then we would start to add long stock/delta to our portfolio.