Macro Theme:

 

 

Founder’s Note:

Futures are up ~25bps as we head into October OPEX week. We start today wrapped in positive gamma strikes, which implies a low volatility session (note the high Stability reading in Trace of 81%). Initial support for today is driven from 0DTE positions at 5,815, 5,800. Resistance is at 5,840.

Below is a wide-strike view of a classic GEX (gamma-by-strike) curve. As you can see, dealer positive gamma is big, and it peaks into 5,875. This gamma, we believe, serves to suppress realized volatility. On this point, 1-month SPX realized vol is <10% (rather low).

This matters particularly into OPEX week, because gamma is highest for at-the-money options, and increases as we get closer to expiration. With realized vol at major lows, it strengthens the idea that realized vol can expand into the second half of this week.

The chart below shows the size of delta notional for all futures expirations. As you can see, this OPEX is fairly large, and very call-weighted (orange = calls, blue = puts).

Further, our data shows that 68% of the time the S&P500 reverses around options expiration (5-day performance into OPEX vs week post-OPEX). Given equities have rallied into this week, it seems to be lining up in such that equities may grind a bit higher for the next few sessions, before OPEX clears out a large chunk of this supportive positive gamma.

The removal of positive gamma “releases” the S&P500, allowing for higher equity volatility, which could, in turn, lead to some equity retraction. In this case, we are circling 10/16 VIX Expiration as a possible trigger point for this higher equity volatility. In other words, if you are looking for a decent correction in this market, the options market frees things up starting Wednesday.

Post-OPEX volatility would line up with the elections in just 23 days – an event which has been keeping longer term equity IV elevated.

Zooming out, we remain of the view that a quick, definitive election result should result in the crushing of this elevated election IV, which could in turn fuel a strong equity move higher into year end. For year end targets we eye 6,000-6,055.