Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are flat ahead of 9:30AM ET VIX Exp and 2PM FOMC.

Be aware that the ES can do many strange things around 9:30AM ET VIX settlement.

Our core idea here is that short term vol is set to jump, which is likely met with a quick contraction. If we break <6,600, then 6,500 is the quick obvious first target, but we are not expecting a whole lot more downside than that as its looking like vol would get slammed near the JPM Strike at 6,505. If Powell is benign, then there is enough IV to contract SPX prices up into 6,675-6,700 in short order – that would be quick upside volatility. Call sellers/0DTE likely then step up into 6,700 into a very large Friday OPEX, which adds resistance.

The 0DTE straddle is $45.5/68bps with an iV of 28%. While that is quite a premium to the 0DTE IV of the last 2 days – “it ain’t much”. And, while SPX IV’s >=1-month did move higher the last few sessions, ATM IV’s are only at 13%. There is no real fear in there, but we are up off of “bottom basement” IV’s of a few days ago.

Turning to SPX GEX, we see that positive gamma has built up in the 6,500-6,600 area. This should help near term stability, as gamma doesn’t flip to the negative side until 6,400, with the first major support remaining the huge 6,505 JPM Call strike. Some of you may note we were seeing more weakness on a break of 6,500, but the positioning has changed (and SPX rallied) and so we have to update our views.

Quite frankly this all reads as the market now has a fair amount of support into 6,500, and the 6,500 magnet strength increases into 9/30. Unless Powell serves up a truly hawkish plan, then we may not see a whole lot more interim weakness than 6,500. The potential for more downside could then open up after September Quarterly OPEX as the JPM Call expires.

To the upside there are plenty of positions up through 6,700, which is the immediate upside target. That’s only about 1.5% of upside from current 6,600 levels, and you can express that upside with pretty cheap call spreads and call flies (ex: Friday 6,700 x 6,750 x 6,800 is going for $3). The ~13% SPX IV’s and 16.5 VIX then likely shift to 11% and 14, respectively which is a vanna-boost for stocks. Over 6,700 there really isn’t much positioning, and so we can’t set targets above that level (at least yet).