Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 60bps, with WTI back <100.

Eyes are on NVDA today and the GTC keynote at 2PM EST.

We also have FOMC + VIX Exp on 3/18, and a massive OPEX on Friday, 3/20.

You can see that with all of the above, plus the Iran conflict, we have SPX term structure in sharp backwardation. GTC, FOMC, and OPEX should, by default, lead to a contraction in implied vol, which should help to lift stocks.

The TLDR here is that this contraction could be a violent reversal, but with the Iran situation we’re cautious to go all-in on this idea, and so we’ll look to express upside with short dated call flies, playing a market rally into the 6,800s. The unique view here, we think, is how violent a pop this week could be (>=2%).

Today’s straddle is priced at $48/71bps, which feels light given 1) the futures move overnight was 57 handles, and 2) the NVDA GTC, and 3 (below):

SPX gamma remains negative across all strikes, as you can see via the red TRACE map. Additionally, vol premium remains high, which suggests that vega/vanna are big drivers in this market. SPX 1-month RV remains around 12%, while 1-month IV is 21% and the VIX is at 25%. This metric remains important, because the ~10pt spread between RV and IV is very wide, and that spread may come under pressure this week, particularly today & tomorrow.

There is strong evidence that suggests that this VIX vs SPX RV spread should contract into Wednesday’s OPEX. You can see this in the graphics below, wherein the peak of wide VIX/RV spreads happens on VIX EXP (0.0 on X), and contracts after. This is a tricky week here, because we have FOMC on Wednesday, and a massive, put-heavy expiration on Friday. Normally FOMCs are “nothing done” events, meaning nothing happens, and the small vol premium associated with them clears away. In this case, given the oil shock, current rate expectations, etc, it could be more tenuous.

That said, if vol contracts it should put a bid into stocks, and it’s hard to not favor this scenario given the very wide vol premium.

Note: “Elevated” spread (red lines) are the top 25th %’ile of VIX/RV spreads, with today being a +99th %’ile spread.

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