Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are flat with Claims at 8:30AM ET.

We see SPX resistance slowing rising, with 6,900 showing as a solid area of positive gamma (resistance/magnet). To the downside, we see 6,800 holding as support, with no real support below that level unti 6,700. This downside view is the same dynamic that has been in place all week.

Today’s 0DTE SPX straddle is also tighter than yesterday, at $26.3/38bps (ref 6,860), which implies the Claims data today is a total non event. It also indicates that selling 0DTE spreads is not a great risk reward. It also implies there is some jump risk in this market, as what would normally be mildly agitating news can turn into something more material.

Consider yesterday’s MSFT AI sales headline which dropped the ES 50bps in about 3 minutes. Yesterday’s 0DTE straddle was 40bps (very tight), and we’d posit that the 50 bps in seconds reaction was larger than what was warranted as traders that were short vol on a 40bps expected move had to quickly cover. MSFT ultimately reversed the headline, but our point is the same…with 0DTE IV this low watch for jump risk.

Ultimately any jump/spasm today should be contained, as the real risk for markets remains in next week. We see this as Forward IV (light teal) remains above SPX IV (teal). This implies event vol tied to FOMC. Rate cut odds are >90%, but traders will hedge forward guidance. The certainty around rate cuts is allowing for upside drift this week as vols slide lower due to lack of realized vol. 5-day realized vol is at 6%, with 1-month at 14%. Given this, ATM SPX IV’s around 18% are rich, even accounting for the 1-2 points of event vol tied to FOMC & PPI. This means vol slowly bleeding is a light vanna-based tailwind for stocks, but next week brings chunky vol changes and jumpier SPX moves.

Given the currently dull SPX dynamics (drift), we’ve recently highlighted single stock plays. SLV (yellow) is starting to see IV and call prices normalize, but it still flags as high IV rank, possibly allowing for some price down/vol down trades. We also see single stocks, like TSLA, catching a call-bid (red arrow, stocks moving right on the Compass chart). Other major stocks are already seeing their calls get bid up into fairly rich levels (META, AMZN, AAPL, etc). This lower right area on the chart is where big gains can be made, but its always a perilous position between upside-gamma-inducing calls and “crashy-overbought”. Right now, because there are many stocks still in the mid-to-left side of the quadrant we are not in the “crashy-overbought” phase, but that could be the look if FOMC is a non-event and stocks stage a final year end pop.

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