Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are off 40bps with Jobless Claims at 8:30 AM ET.

The playbook heading into Wed was looking for a market rally due to vol contraction into VIX expiration. We were looking for a rally into 6,800, but 6,750 appears to be “all she wrote”. Friday’s OPEX could offer some market relief (short term bounce), but that bounce may come from Friday & ~6,500.

The chart below is of VIX, and we marked the exact moment of VIX expiration. 9:30 AM, the settlement time for March VIX, marked a 2 week low. Vol was then bid VIX Exp, and sparked even higher after FOMC when Powell did little to contain rate fears.

The elephant in the room is obviously Iran & oil, which continues to hold its bid. Given that, the big level that likely everyone will be discussing in the coming days is the 6,475, because that is where the JPM Collar puts are located for 3/31 expiration. We are eyeing that level as a major support line into the end of the month. After 3/31, we see no real support until 6,350.

While we think most of you understand the obvious need to watch oil markets here – it’s because the correlation between oil (candles) & equity volatility (blue) is extremely high. You can see this via the plot below, which shows how the two have been moving in tandem over recent weeks. More simply stated: If oil goes 150-120, VIX likely goes >40.

We normally start our notes with gamma positioning – but in this case we left it for a bit later in the note because the positioning is no different from that of recent days: negative gamma “all over”. This means that dealers should be chasing price both higher and lower, which should exacerbate volatility. In this case we are more focused on implied volatility impacts vs gamma, as if oil goes higher/lower then volatility goes higher/lower, and the major equity drivers are more likely vega & vanna.

Here is the tricky part with this: if Trump somehow manages a deal, and oil prices drop, we should see a very violent equity market rally. This would be driven by two things: 1) the massive vol premium and 2) a forced rebuying of call options. No one wants calls right now, not only in the Indexes, but also in single stocks. You can see this via the Compass Put Skew vs Call Skew plot. All stocks are clustered in the lower right here which shows Call Skews are ~5th %ile lows, and Put Skews are +90th %’ile highs. Our takeaway from this is that legging into a few longer dated (+1-month) call spreads as right tail insurance may make sense in case of a “sneaky deal -> huge stock market jump”.

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