Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 10bps, with no major data releases on tap for today.

TLDR: Our upside thesis remains in tact, with a target of 6,800 for this week. The idea here is that downside protection is burning into and around OPEX – not that traders are looking to express upside. That said, risk remains very high to the downside, with the door does wide open for a sharp decline into ~6,500 if geopolitics and/or FOMC turn risk-off. Given this we chose to play upside via short dated call spreads and/or flies. After Friday/Monday our rally thesis is likely gone.

SPX gamma remains deeply negative across all strikes, suggesting large market swings should remain in play. This is shown by the purple GEX line, below.

We yesterday laid out our thesis for why markets may rally this week, and that thesis remains in tact from a flows perspective as today is the last day March 18th VIX Expiration contracts can trade. Tomorrow’s VIX expiration marks about 40% of total VIX contracts expiring.

Further, we generally assume the FOMC tomorrow will lead to a contraction in event vol, which could give a mild bump to stocks. These flows are in contrast to a challenging geopolitical environment – and on that point if crude jumps higher then it may overwhelm our thesis. For this reason, we elected to play upside via Friday or early next week call spreads or call flies, which would benefit from a rally up into the 6,800 area.

The thesis here for a stock rally driven by VIX expiration is that traders are positioned long VIX calls (orange), and long VIX puts (blue). In If vol starts to come in, traders may move quickly to monetize rich VIX calls, which should help support the SPX. As today is the last day for March VIX options to trade, the covering of long VIX calls could be in play for today. In total there are 3.4mm calls and 2.4mm puts rolling off.

Interestingly, as you can see below, the “transition point” between long calls and long puts is around 22-23, which is where the VIX is currently. Given the positioning, there is not a ton of VIX delta left to squeeze, but vol coming down into negative gamma upside could be enough to lift stocks another percent.

This leads us to NVDA, and Friday’s OPEX.

Yesterday’s NVDA GTC failed to spark a bit in the stock, and equities generally. However, the problem here is really for bears as put skews across all equities remain heavy, and downside isn’t materializing. So what we are seeing here is a slow drift to the right on Compass, which is a signal that put IVs are losing some value (not calls catching a bid). We think this can keep pace into Friday, which, again, could help bulls this week. If you start thinking out past next week it seems that traders still have very limited desire to express upside.

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