Macro Theme:

 

 

Founder’s Note:

Futures are +75bps higher this morning, after heavy weakness on Friday.

TLDR: Resistance for today is at 5,500 then 5,515. Initial support is at 5,400, with more material support near 5,340.

5,400-5,500 is a negative gamma zone, a position which should generate large price swings. Those price swings are likely to be very unstable – meaning both rallies (like this mornings) and declines could lose strength very quickly.

Therefore, for bulls, its only a recovery >5,500 that would offer longer-term price stability. For bears 5,350 is the longer term downside target.

At Friday’s close, the SPX was -4.2% over the first 4 days of September, with QQQ’s -5.8%. NVDA, seen by many as the worlds most important stock, is -13.5%. That is some pretty heavy downside pressure.

On Friday we laid out the “gamma trap” that we saw setting up in the SPX broke <5,500. We were also looking at the relief area being <5,400, due to local dealer positive gamma strikes in that area (from trades selling puts). What we saw on Friday through

HIRO

was heavy put selling once the SPX hit 5,400 (see Friday’s PM note). Some put selling in that 5,400 zone made sense due to the high IV (ex: VIX +23) generated by the day’s sharp price slide and the upcoming weekend.

What this put selling did was alleviate short term pressure near 5,400 (due to long puts sold), and rolled the major support down <=5,350 (due to put shorting). While this put selling helps to clear some short term pressure, we don’t really “clear the deck” of big puts until 9/18-9/20 expiration. This means that risk conditions remain high.

We’ve mapped out the

gamma profile

with our beta SPX model, which depicts these gamma peaks at 5,340 (support) & 5,530 (resistance).

While today’s rally is reliving some short term price oversold conditions, its, at the moment, only offering a very mild decline in vols. You can see this via fixed strike SPX IV below. This is comparing the current IV vs Friday’s close, and as you can see IV’s are largely down only about 1/10th of a vol point. This suggests equities are to remain “jumpy”.

Flipping to NVDA, we see Friday’s test of the 100

Put Wall

as pushing the short term lower bound of options positioning (i.e. oversold). Our data from Friday shows a large 25k, 90 strike put seller for 9/13 exp, and some slightly longer dated call buyers also stepping in (Sep-Oct exps). The takeaway here is that this flow can create a short term tradable bounce into big upside strikes of 105 – 110. A break of <100 likely the longer term “hold your nose and buy” level.

One last note on these market conditions:

Liquidity really seems to be terrible. Shown here is E-mini liquidity, which is at 2 years lows per the CME. We also take issue with the level of options trading that is 0-DTE/Next expiration focused, because that flow seems to disappear when markets nose-dive (a study of this is coming shortly). This means that when traders are forced to trade (ex: delta hedging, margin calls), they have to pay-up for liquidity, which exacerbates volatility. We’re not sure what alleviates these conditions – our first thought is post-FOMC if/when rates stabilize.