Macro Theme:

Key dates ahead:

Founder’s Note:

ES futures are off 20bps, NQ -60bps, however RTY is +22bps. This after AVGO missed (-5.8% AH).

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Combining AVGO results the ORCL drubbing (-11% y’day, down another 1% AH’s) has tech dragging, but the positive RTY & DIA suggest equity rotation in play (vs asset rotation i.e. out of equities into bonds). SPX IV’s are non-reactive to these earnings, too, suggesting that the trend higher remains in tact.

Speaking of trends higher, IWM has broken to fresh ATH’s. We think these fresh highs are unlikely to be faded in 2025 as we head into a seasonally bullish time frame, driven by holiday-driven vol contraction.

ES off 20bps implies SPX 6,880, which is only 50bps from all time highs (6,920) set back in Oct. What we see on the TRACE map is mild positive gamma (i.e. no 99th %’il strikes), but its spread over a fairly wide range of from 6,850 – 6.900. This suggests some support in here, and while it’s not massive, it clouds a clear path lower for shorts. If the gamma below was negative (red), then we’d be more open to a sharp draw down. <6,860 you see that strike gamma drop (we’d be neutral), but gamma does not flip to materially negative until <6,800 (we’d lean short).

Overall, should SPX close above 6,900 then we think it marks positive gamma tied to some longer dated positions which could aid a final year-end rally.

On the topic of IV’s, we’ve essentially hit “Holiday Vols”. We had yesterday flagged a swath of “cheap” ~10% IV’s around 20-25 delta, and that area has now expanded to include the end-of-year options for delta into the 30’s. As with yesterday, maybe you don’t think the market rallies, and thats fine, but that does not change the fact that these upside strikes are objectively cheap. You can see there is a path of expirations from 12/18 to 12/26 that are not quite as cheap (think “basement vs “sub basement”), and that is due to CPI/NFP plus some expirations.

Being clear, puts are cheap too. However, we are heading into a weekend, then VIX exp/OPEX next week, then Xmas holiday, then New Years. Those holidays serve vol contraction, which is a time-decay toll for options holders. Yes, the toll is low because the puts are cheap, but the vol contraction should help as a vanna-based tailwind for stocks which is why we favor the calls over puts.

Those calls above being so cheap is a signal that traders are not looking to long them, and with IV Ranks <10% its clear traders want to short options over the holiday. This anti-long options position is true not only in SPY & QQQ, but also the breakout leader, IWM. We also flag the “positive gamma at longer dated expirations” above, and the big dealer long calls at ~7k (+ 12/31 JPM strike), and we get the picture that dealers are offering calls here to offset 7k decay.

Lastly, we had to bring up silver (again). We discussed put flies into the “Nearly 100% IV Rank” period of 12/1, and that marked a fleeting 1 week period of price consolidation. This admittedly offered a very brief window of put-fly profitability, with our personal put flies currently having negative PNL (for full transparency). In the 3 days since FOMC silver has added another 9% (!), but the SLV vols are doing something quite odd… they are shifting from extreme calls to neutral. That is odd given the 9% rally.

Changing the grid to Call Skew vs Put Skew, we see can see those skews are “getting wing”, meaning the skews are both rising. This skews rising appears to be from at-the-money IV’s declining. Because this is ultimately a commodity (which can have different vol drivers & characteristics from stocks), we are going to pause from speculating on why those ATM IV’s are dropping, but its interesting given the 9% move higher, and suggests that maybe some larger players are starting to monetize this move and/or play the very high vols. Maybe its time for SLV to take a pause….

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