Macro Theme:

Short Term SPX Resistance: 5,200

Short Term SPX Support: 5,100

SPX Risk Pivot Level: 5,200

Major SPX Range High/Resistance: 5,300

Major SPX Range Low/Support: 5,000

‣ 5,300 is the short term upside target.*

‣ 5,200 is critical support, up from 5,100 on 3/20. Below 5,200 is our risk off indicator.*

‣ 5,300 is our target into April OPEX.*

‣ NVDA’s event on 3/18 failed to renew the call bid in the chip sector, likely triggering longer term consolidation in the space (ref: 216 in SMH).**

*updated 4/1

**updated 3/19

Founder’s Note:

ES are +20bps to 5,210. NQ futures are +30bps to 18,135.

Key SG levels for the SPX are:

• Support: 5,147, 5,115, 5,100
• Resistance: 5,200, 5,220, 5,250
• 1 Day Implied Range: 0.61%

For QQQ:

• Support: 435, 430
• Resistance: 440, 445

IWM:

• Support: 200, 195
• Resistance: 205, 215

  Call Wall

NFP 8:30AM ET, Fed Barkin 9:15 AM, Fed Bowman 12:15 PM

Suddenly today’s 8:30 AM ET NFP print is this incredibly important datapoint, as shown by the very elevated IV’s for todays expiration. Today’s 0DTE straddle is just $43, or 83bps (ref 5,165, IV 30.5%), which feels light given the massive drop yesterday, and VIX just south of 17.

Pundits are suggesting a “good print” (which, we suppose, is people lost jobs) will lead to a volatility crush and the market vanna-ripping back to all-time highs. Our gut is this is not correct. Yes, a stock-friendly print could generate a tradable bounce, but we think that that 5,200 SPX level would be rejected.

As we’re going to dig into below, yesterday seemed to unlock traders with views out past 0DTE (read here). Traders seemed to be hedging some “known-unknowns” (i.e. not hedging a single NFP print, but some geopolitical or rate shift narrative) and so equity vol was bid, to the point of VIX going to 17. Yes, some traders are likely looking to scalp some day trades, but it certainly seems like people with views out past today were active. We saw some VIX call selling in the teens, but chunky buyers in the low-to-mid 20’s.

Those with views out past 0DTE is where the big money is. If yesterdays selling was indeed more about geopolitics and oil instead of rates, then how does NFP solve that?

Should the SPX close > 5,200 then we’d be forced to re-consider long equities/short vol into next week, but we think risk remains extremely high <5,200.

There are three key area’s flagged this week which merit review:

1. 0DTE has been dominant this week, providing the illusion of market support. That flow pushed markets to highs into yesterday afternoon, and then turned on markets yesterday at the highs (from 2PM to 2:30PM), and then sat idly into the afternoon (post 3pm ET) while equities plunged lower.
2. Some macro flows seemed to be unlocked this week (again, see note yesterday), and that macro flow seemed to pick up with yesterday’s selloff. To this point, there was a put cover at 5,200, but that flow failed to turn the market higher/bring mean reversion, only temporarily pause price action.
3. There is a tremendous amount of leverage in equities, which has been reflexively built up. This shows as incredibly low volatility/tight trading ranges driven by 0DTE, call overwriting, vol/put selling, and even leveraged products like NVDA 1.5x/2x/3x ETF’s. The breaking of these feedback-flows could invoke violent unwinds as short vol positions have to be covered, and long vol positions have to be initiated. If our views are right on this then yesterday would just be a vol amuse-bouche, not a full clearing of these

1) One of the key risks flags for us this week was the dominance of 0DTE flows which was bringing mean reversion into markets (read here). Because of the high levels of 0DTE, we thought that price action was fleeting, and risk was high. Yesterday, up through ~2:30PM ET flow was again dominated by 0DTE. That 0DTE pushed equities back up near all-time highs, and traders were feeling good. All that ended rather violently around 2PM, when markets turned sharply lower, with the helping hand of 0DTE. What you can see in the plot below is that the 0DTE flow (teal) is tightly shifting with the All Exp flow (purple). This suggests that 0DTE was the bulk of options flow up until ~2:30ET, wherein the S&P500 dropped into major support at 5,200.

At 5,200 (red horizontal line), options traders, particularly 0DTE, began to cover their put positions (red vertical line). This is what we’d expect – 5,200 to initiate support with put covering. However, the market was only able to maintain 5,200 area support for about 20-30mins, and then as soon as that put cover stopped, around 3pm (yellow line), the market plunged another 1% lower. What you may note there is that the options market did not really participate in that final leg lower. This can be seen by the

HIRO

lines staying mainly flat from 3PM to ~3:45PM. That final leg lower was not options induced – it was some other flow, which takes us to point 2.

Before moving on we do not there was a giant put-cover from 3:45 to 4PM which supported equities off of the 5,150

Put Wall.

This is seen by the

HIRO

lines jumping into EOD.

2) We try to avoid macro narratives here, as our focus is on options. However, volatility usually jumps across asset classes, which warrants monitoring non-equity flows. As we stated above, gold, oil, and rates all started moving earlier this weeks while equities were flat (see chart at bottom of yesterday’s note). Regardless of narratives as to what triggered selling yesterday, its abundantly clear that oil (orange) ripped just as equities (yellow) and 10Y rates (red/green) dropped. However, note the correlation between crude and vol futures (blue). The importance of this, through our equity-vol based lens, is that if macro flows shift it will force the hands of short vol traders. 0DTE’s can’t exhibit the same control as we saw earlier this week.

3) Volatility. Today we are releasing a ~40 minute presentation on the state of volatility, and how incredibly low it has been. We’ve spent weeks researching the material and scheduling the release of the presentation – it figures vol finally pops yesterday….

At any rate, below shows the intraday trading range for SPX, and yesterday’s 2.15% range was the highest range since 10/6/23. However, 10/6 was an up-day for equities. You have to go back to the March ’23 bank crisis to find a daily trading range >2% which was also a down day.

The March bank crisis was the last time traders had to hedge known-unknowns. We all knew banks were in trouble, but we didn’t know which banks, and if/when the next shoe would drop. Therefore you couldn’t hedge with 0DTE’s, you had to own longer dated, long volatility positions. You needed to own vega.

Maybe yesterday was an isolated spasm and equities rip back to all time highs. The problem here is that, because equities have built up this reflexive short vol position based off of unprecedented calm, the cover trade and flip to long vol could lead to much more pain. Its like a forest fire heading into dry tinder…there is plenty to burn. If we were given regular bouts of some equity volatility, it causes the regular rolling and shifting of long and short positions. It creates balance which we’d argue doesn’t currently exist due to prevailing short-volatility complex. If indeed there is sizable demand for long volatility hedges it could force covering from the short dated, short vol/put crowd which would add to equity volatility.

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