Macro Theme:

 

 

Founder’s Note:

Futures are flat after yesterdays closing at a record of 5,762. Staying true to our forecasts into yesterday, the close >5,750 has us looking for a move up to 5,800. Initial support now shows at 5,750 & 5,730.

How do things look post-JPM roll?

1) Positive gamma is a lot lower. Accordingly, the SPX is less stable (i.e. SPX can move, more), as shown by our Stability reading of 65% (red box). This yesterday had us calling for a move out of the 5,700-5,750 range, and that seems to be on tap this AM.

2) 5,800 is now the new zone of large relative positive gamma (yellow box). We think of that area as a price magnet, and it is our current SPX price target.

3) We see traders are short puts (dealer long) below 5,750 (green box) which should offer support into 5,730.

Overall the window for short term/0DTE options HFT to “work” remains open. In the next few weeks they arguably do not have to worry about (like a big vol-inducing data print), and the “pinning power” of the JPM gamma-hedge is gone. This allows them to sell 0DTE S&P options, which stabilizes markets, and they may be looking to lean long the short dated (“0DTE”) options in big tech: Mag7, semis, etc. This is the “correlation trade” which comes in a few different forms: dispersion, momentum, etc.

This trade matters for us because 1) SPX should be well supported (i.e. less subject to a big intraday drop), and 2) if you want to be long you likely want to focus on that semis/big tech space. That space is where the calls are trading.

And, yes, I too heard small caps should outperform after the rate cut, but at least so far, that isn’t happening. In fact IWM (candles) is +1% since FOMC on 9/18 vs SMH +5% (purple).

In regards to the roll itself, it seemed to have sparked a large intraday swing. We covered a lot of these dynamics last night, and wanted to add a few other points here.

First, the market was very stable until ~2:10PM, wherein we saw a precipitous drop from 5,740 to 5,703. This drop coincided with heavy 0DTE put buying (light blue) – in fact all the put buying was 0DTE. Fascinatingly, that put buying stopped exactly when the initial JPM print went up.

Subsequently, immediately after the print, the SPX ripped +1% to close at 5,762. What’s unique about this is that we can’t recall having seen 0DTE puts used as part of this trade before. The timing of all this, though strongly suggests they were.

We believe that the JPM collar’s broker would be short futures as a hedge coming into Monday, and so its possible they loaded up on 0DTE puts, and then printed the new Dec collar. Following that, they covered their short futures, but not the 0DTE puts (as they’re a cheap hedge). This futures short covering could have sparked that massive rally…and it seems that the 9/30 exp 5,750 calls (which dealers were likely long) were not closed until closer to 4PM. Those long 39k calls made $3.9mm for every point the SPX closed >5,750. Conspiracy!

While we aren’t sure on the futures piece of this narrative, none of it changes the fact that we all here knew the big options trade was coming, and it could move markets. The value of this options data is that when you see large options driven moves, you aren’t caught reaching for some big macro narrative, and you can act accordingly.