Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are off 30bps, with major support at 6,620 (SPY 660) and 6,600. A break below 6,600 implies we test the big 6,500 strike into 9/30. Betting on this 6,500 tag into 9/30 is still cheap, as 9/29 expiration IV, for example, is quite low. To the upside 6,640 has very large 0DTE, which is a level to watch for Seek and Destroy. Even if SPX does slide down into 6,500 we think short dated <9/30 exp IV’s would remain pretty contained given the large positive gamma supplied by the JPM call at 6,505. We do have some increasing concerns about what happens into October…

As we covered heavily the last few days, SPX IV’s put in a high on Monday night, with corresponded with the move to 6,700 while VIX simultaneously moved 1-2 puts higher to >16.

Below is the SPX IV at current vs the close of Monday, and you can see that IV’s are lower even though SPX prices are 1-1.5% lower from those ATH’s.

Lower vol into lower stocks makes some sense given the stock up, vol up moves in the prior week (i.e. upside vol was overbought).

But, honestly, this whole situation is just weird, and is very well framed by the very smart guys at Macro Risk Advisors:

The implication here is that, give this SPX price action, you’d normally only have a VIX 16 if there was a major event being hedged. As we’ve stated previously, BOFA has explained away this dynamic as a function of money flowing into vol products like VXX/UVXY etc. We don’t love that explanation, but we lack the data to dispute those claims. Having said that, the argument here is that if dealers are long a lot of longer dated “VIX” they need to cover the carry, and maybe do that by selling short dated SPX options/vol, which is what has been mashing down 0-5 DTE IV.

What we can say is that the SPX vol surface itself has (and has had) a big kink in it related to 9/30 OPEX with low IV’s before 9/30 and relatively higher IV after.

You can see this in the term structure below, and its a dynamic we’ve flagged many times over the last few weeks. We’ve additionally made the argument that up into 9/30 OPEX dealers are gorged on long gamma not only related to the 6,505 strike, but also likely trades around it. Also following 9/30 we have the cyclical data releases of ISM/JOLTS/Jobless claims, etc. Given that, the SPX term structure is quite a bit higher for all expirations >9/30. These higher IV’s line up a bit more with the +16 VIX, which is weighted to 1-month SPX options IV.

We quite frankly don’t know how this plays out, but this overall dynamic is quite odd. Our instinct here is that SPX prices start to see higher levels of volatility >9/30, such that realized vol moves higher to meet these higher implieds. Additionally the 6,500 floor comes out as the JPM call expires Sep 30th. If you were to setup an October “trap door”, this is what it would look like.