Macro Theme:

 

Short Term Resistance: 4,500

Short Term Support: 4,450

Risk Pivot Level: 4,500

Major Range High/Resistance: 4,600 SPX Call Wall

Major Range Low/Support: 4,400

‣ Entering into the week of 9/11, there are a litany of catalysts including: CPI (13th), big Sep OPEX (15th), VIX Exp & FOMC (20th). *

‣ Our trade is to enter “long volatility” positions into CPI, with current ATM IV’s for a 30 day SPX option is 11.8% (too low, in our view). A bullish CPI/FOMC could produce a sharp upside shift, in which case we’d target >4,600 into the end of Sep. A bearish reaction could move the market <4,400. We think the market is underpricing our target levels.**

*updated 9/5

**updated 9/12

 

Founder’s Note:

Futures are 40bps higher to 4,535. Both the SPY & SPX

Call Walls

have shifted to 450/4500 which is our major overhead resistance line for today. Support shows at the 4,450

Put Wall.

Our daily range remains extremely narrow at 0.53%.

 

In QQQ support remains at 370, with resistance at 375 & 380.

TLDR: Our views here remain in line with those that we outlined several days back. We’re looking for a fairly large move out of FOMC (9/20) into the EOM (9/29). 4,500 is now “fair value” into 9/15.

Our projection for an in-line CPI reading was that the SPX would yesterday move up toward 4,500, and lV would deflate. While yesterdays SPX move higher was thwarted into the close, it appears to be running higher this morning. Volatility, though, is being smothered.

This can be seen in the fixed strike grid for SPX, below. This shows the day over day change for all S&P strikes across all expirations, and the sea of red informs us that yesterdays CPI reading was a dud. Traders got what they expected, and the event volatility premium has burned off. Macro eyes now shift to the FOMC on 9/20, and the 0DTE crowd likely sees 3 days “risk free” as the FOMC isn’t until next Wednesday.

In options land we turn to 9/15 OPEX, which is quite large. This is suppressing volatility, as implied by our tight 53bps 1 day range. Its also very neutral, as shown in the plot below by

call gamma

(orange) being the same delta notional size as puts (blue) across all major indices. We usually look for mean reversion after OPEX driven by an imbalance of positions. Here, we don’t seem to have an imbalance.

 

We also interestingly have our largest SPX levels converging, with the 4,500

Call Wall

just 50 handles above the 4,450

Put Wall.

This is a volatility choke point, and while there isn’t a directional lean to it, these positions clearing out should allow for larger directional swings out of FOMC.

 

This is one of these interesting inflection points wherein our models start differing from the streets options-implied views. Next weeks ATM SPX options have a 10% IV for Fed Day (9/20) and an 11.6% IV for 2 months out. Essentially the market is, at this point, pricing in no volatility going forward. The argument here is that why should one bet on higher volatility when 1 month realized SPX is ~11% and we have a rather long streak of complacency. However, with expiration clearing out that vol-crushing gamma, volatility map pop higher.

There is a lower bound to implied volatility, based on realized movement. Traders are now betting on 60bps moves in the S&P, and that is a rather low threshold for realized volatility to break. When these ranges break, we think it causes jumps in volatility, as traders have their hands slapped for betting on the market literally flat-lining. To us, this is the classic “picking up nickels in front of a steamroller” moment.

We think we’re at this point know where you add the clearing of both equity OPEX & VIX OPEX, then add on FOMC and some big end-of-month SPX magnet positions (JPM 4660 & 4200). If the S&P does move up or down >60 bps you could end up with a volatility pop as traders have to run for cover. This works clearly to the market downside, but could work to the upside (i.e. VIX up, market up).

We did a video on this concept back in May, which you can find here. As you can see the VIX hit fresh lows into May 1, with the SPX at highs there was a sudden episodic spike in vol as the VIX tested 20 with the SPX down 2.5% (this is when the debt ceiling was being flagged as the cause for concern, into an FOMC). Ultimately, traders took that relative bump volatility and sold it, while pushing SPX to new highs.

To be clear, this does not mean that the VIX has to hit 30 with the S&P dropping 10%. It does however suggest that market moves could be more jumpy than most anticipate.

Ironically a pop higher in vol now could energize larger volatility sellers to enter, which could help us hit fresh volatility lows into October – an idea we can discuss on today’s 1PM ET Q&A.