Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are off 20bps ahead of CPI.

The 0DTE straddle is going for an unimpressive $43/73 bps (ref 5,835, IV 28%). To put this into context, NFP a few weeks ago commanded a 0DTE 1.1% straddle.

That low straddle price indicates to us that traders are not respecting the volatility potential of this market. Take current SPX GEX, for example, which continues to show as negative. We continue to see some large positive gamma strikes >=5,900, which is ~70 handles from current SPX levels. To the downside we see very small positive gamma strikes, but those are dominated by some larger dealer short puts at 5,750 & 5,700.

So, if CPI is hot, there is not an obvious support point as this map suggests slippery downside – and certainly the potential for >=73bps of movement.

We’ve of course been harping on the idea that implied vols were too low, and that was resulting in a negative risk premium. The weekend US/China talks have only further reduced implied vols, with >=1-week SPX ATM now <16%. That implies <1% daily moves in the SPX, vs 1-month SPX realize vol at 19% (1.19% daily SPX moves).

If CPI & PPI are both benign, its hard to argue against the SPX drifting up into the 5,900 & what seems to be larger relative SPX positive gamma. That positive gamma may work to reduce volatility, justifying current IV levels.

At the moment, we do not see any change in the SPY gamma picture. SPY has been holding the bulk of negative S&P500 gamma, and it seems poised to maintain this negative gamma through Friday’s expiration (yellow like shows GEX – Friday’s OPEX). We note that >590 there is a sharp reduction in negative gamma, which should serve to add less fuel to upside fires.

The last thing to consider here is Friday’s OPEX, which went from very call heavy last week, to immensely call heavy after yesterday’s +3% rally.

I mean, +90% of Index (Nasdaq, Russell) value expiring is tied to calls?? This is as extreme as we can ever recall having seen it, and it suggests a lot of calls, and their related long stock hedges, are set to be removed.

What takes a bit of this edge off is that its not a massive quarterly expiration, but it is still sizable, and we think leads to a market correction into next week.