Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 25bps with ISM at 10AM ET.

Oil remains at recent highs, with gold and silver bouncing. We watch oil as a proxy for conflict, and it probably leads equity vol.

Negative gamma continues to dominate in the S&P500, as you can see by TRACE being red <=6,875. This is tricky, because on one had the SPX is more or less bouncing at the same level(s) it has since Thanksgiving. However, we now have major known-unknowns in the form of war. You just don’t likely want to be sitting here short vol with VIX at ~22 when things in the Middle East could likely get very much worse. Lets hope they don’t.

To this point, the SPX this AM is marked at 6,825 which is just ~75 bps off of Friday nights “pre-war” close. SPX vols, however, are stuck higher, as you can see with the liquid 3/31 expiration ~2pts higher across the skew. Our argument here is that current IVs aren’t likely to go much lower in the near term, which throttles stock gains (no sticky “vanna rallies”).

The SDEX here shows the price of a 1-month OTM SPY put vs ATM, and you can see two things: 1) this index moved up sharply over recent days, and 2) its more-or-less just normalized to pre-2024 levels. That latter piece is story to unpack for another day, but in the near term is suggests put hedges were in demand.

Looking at recent market activity through this framework: on Monday’s initial “buy-the-dip” response to geopolitical news, we observed significant put selling — likely reflecting traders cashing out existing equity long put hedges and/or VIX call positions. We know this market went into the Iran crisis pretty well hedged: index put skews were at +95th %’ile (ex: SDEX chart)

Yesterday saw a fresh leg lower to 6,700, possibly due to lack of hedges to monetize. That recovery was driven primarily by 0DTE put selling at the open, alongside some buying of longer-dated calls. Overall flow was modest, with HIRO registering just $2bn — well below the 30-day peak of $12bn.

That said, Tuesday’s bounce was somewhat more constructive than Monday’s, since non-0DTE call buying tends to represent more durable bullish conviction compared to short-dated activity. Despite this, the TRACE above map still shows the dominant positioning as large negative gamma bars tied to non-0DTE puts — a reminder that the underlying market structure remains cautious.

All this is not to say that its pure doom-and-gloom. In recent notes and in the Macro Theme we’ve noted SPX 6,600s and VIX >=30 as a rough proxy for when things are “washed out”. Yesterday AM saw 6,700 and VIX 28 – not really a panic low. There was clearly a violent bounce from those levels, and we think that in these regimes you want to play upside via call spreads or call flies instead of delta 1 or short puts positions.

Sure, short puts can pay nicely in this environment – if wars cool off (lets hope they do). But the risk of being short puts when conflict escalates is quite scary, and that would knock put sellers out.

At some point risks should clear, positive gamma should reform, and we can start to believe in more stable rallies.

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