Macro Theme:

 

 

Founder’s Note:

ES futures are -20bps.

Very little has changed in the past week, as the S&P has held the same 5,800-5,875 price range for +7 days.

For today we do not see that range being violated, as support again shows at 5,820 & 5,800. Resistance is (again) at 5,850 & 5,875.

Given a complete lack of SPX movement, we currently have little to add on S&P dynamics vs yesterday‘s view on election vs FOMC & Monday’s volatility view. With that, we wanted to turn to small caps.

IWM’s options complex is significantly larger than RUT, and therefore IWM is our preferred way to gauge potential options impacts with small caps.

In this case, what catches our eye is the massive 220 strike, which holds +$200mm in total gamma. As long as IWM holds this level, we think IWM’s hold a bullish stance. The issue is, we also read traders as having sold upside calls into the 230 strike, which reduces upside momentum. The result of this gamma is, much like with the S&P500, upside momentum stalls. On this point of “stalled momentum”, IWM 1-month realized vol is just 14% – which matches longer term RV lows. So, IWM is stable, but needs a trigger to drive prices higher.

Overall, while IWM is >220, we look at 225 as first resistance into the election, and 230 as a post-election upside target.

To the downside, dealers appear to hold a negative gamma stance all the way into 200, which is a large support strike. Should the election (or FOMC on 11/7) invoke risk, that downside <220 would be quite slippery and quick into the 210-220 area. A break <220 is our short trigger.

Lastly, we wanted to touch on TSLA, which reports tonight. The implied move is 6%, which is ~$13.

Going into earnings, we like to review the established upper & lower bounds based on projected gamma flow. The idea is that as gamma reduces, dealer-induced hedging momentum reduces, too.

In this case you can see the gamma curves (orange = calls, blue = puts) “flatten out” both <185 & >250. We would treat these levels as our upper and lower bounds for potential spread structures into a post-earnings TSLA move. We would also use these bounds as support and resistance given a large post-earnings move. Note these zones are about 13% from current at-the-money levels – a bit farther than the implied move of 6%.

The second dynamic we look at there is vol.

Friday’s exp (yellow) is indeed quite elevated, but anything past this week seems remarkably tame. Shown below is 1 week (gray) & 1 month (teal). There is also not much of a skew, which quite frankly seems to present little obvious opportunity – particularly on the short side.

If anything, with 1-month ATM IV at 56%, its implying a 3.5% move. This seems a bit shallow to us, particularly given the upcoming election & FOMC. The takeaway here is that we think +2 week vol might be a bit underpriced, which is counterintuitive into an earnings report.