Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are +15bps after the US-EU trade deal.

ES was +25 handles higher immediately following the news, but now the indicative open is for SPX 6,400 which is a key support strike. We see additional support at 6,390. There are a large number of 0DTE contracts +1% higher at 6,460 – and while we don’t think that comes into play today, its worth noting.

The major dynamic we are watching here is implied vols, with SPX IV’s hitting 5-6% lower bounds on Friday. Those vols have reflated slightly after the weekend, but we still see ~10% ATM IV’s, with tomorrows expiration >6,400 strike IV’s at 9%. With an EU trade deal seemingly done, thats one less risk for the market to watch – and so we are primarily left with 7/30 FOMC (as far as “known” risks go). Additionally there is little on the data front for today/tomorrow which somewhat backs the idea of <10% IV.

Looking out at the SPX term structure, later this week is where the action is with a kink higher for FOMC, then Jobless Claims/PCE Thurs & NFP/PMI Friday 8/1 (which is wear the peak of the SPX term structure rests). Toss on Wed PM MSFT & Thurs PM AMZN/AAPL earnings for some additional potential volatility.

If some of this data is a miss, then we could see a decent pop higher in vols as the market is now pricing in perfection, and would have to adjust. However, if this data is all in line (as is likely the case), then vols are likely to move to ~10% (VIX 12) by next week, and it would likely mean we test 6,500 into August expiration.

So what’s the trade?

We’ve been recommending owning a sliver of SPX puts/VIX calls as if vol squirms a little its likely to be more jumpy than most expect (due to the very low vol expectations). Conversely, should this VIX 12 play out then being short VXX/UVXY vix put spreads or short call spreads likely pays.

But for something more material we like owning single stock options and/or select ETF’s vs owning index volatility. For example, SMH, IWM, IBIT all show as very low IV and “average” put vs call prices. Said another way we like owning 1-month SMH calls instead of 1-month SPY calls.

Interestingly, the 1-month performance of SPY/SMH/IWM is identical but the upcoming slew of tech earnings may add a bit more vigor to SMH over the next 1-2 weeks. The same may go for IWM around FOMC. We can’t help but think this extremely low vol is likely to keep traders swinging at meme stocks – and we like fading big vol moves in those retail heavy/chase names.