Macro Theme:

 

 

Founder’s Note:

ISM Manufacturing 10AM ET.

Traders will be watching PMI & NFP on 9/5 & 9/6.

Futures are pulling back this morning, moving the SPX back to the major support zone of 5,600 – 5,620.

We remain risk-on with Friday’s close >5,620, and hold a stop <=5,590. 5,700 is the big upside target for this week.

Below 5,590 we think the scales tilt toward the downside, with a large support zone at 5,550 – 5,440. The position offering that support expires today.

As we discussed on Friday, this is a “short call” market. Meaning, after NVDA ER’s there seems little enthusiasm for a robust equity move higher, as seen by retracting call IV. However, that is distinct from a market in which you want to buy puts because you believe downside is imminent.

This call selling has stuffed dealers with gamma into 5,700, which is where we see positive gamma peaking. You can see this in the sneak-peak of our new gamma (GEX) model, below.

This big positive gamma infers upside resistance & pinning into 5,700, as dealers sell into upside market strength and buy weakness. To the downside, as per our note at the top, there is a large node of positive gamma down near 5,550, which should offer support if that area is tested.

So, what’s the point? The act of selling calls (betting on capped upside) causes reflexive flows that further throttle upside (dealer positive gamma). Without a big catalyst, the options market is going to likely to keep directional movement low.

The first order trade here is to to look for IV to contract. Second, is playing mean reversion: buying dips & selling rips at key gamma levels.

In regards to the vol complex, we read 1-month SPX IV at 17% (green line), due to the fact that early-August volatility is still in the trailing 20-day window. However, as those early August days roll out of the rolling window, we should see realized/historical volatility start to drop sharply. This eases some forward-looking volatility models, which may invite some vol selling (a gentle tailwind for equities).

Looking forward, there is the major convergence of critical dates at 9/18 FOMC/VIX Exp & a huge 9/20 OPEX. These events are going to buoy the VIX, as they are within a 30-day forward window (VIX is calc’d ~30 day exp SPX options).

This may give traders a ~2 week window to lean short vol, which should be supportive of equities.