Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are off 30bps, with Crude ~3% higher.

We had painted a very dire picture yesterday AM, before Trump seemed to back off of his 48 hour ultimatum. Bombs did fly last night, but Crude remains off of weekend highs (CL now ~92 vs ~100). Given the dynamic that the situation is still hot, we think the market is going to re-test the 6,475 JPM strike, and has a big chance of pinning that strike into 3/31 OPEX (next Tuesday).

To the upside, we are watching the +6,700, particularly into 6,800 area as heavy resistance into 3/31 OPEX, assuming there is no actual deal. This is because we have seen call sellers pile in when the market rallies to that zone – even going back before the Iran situation. We assume those traders would step back up if given the opportunity. If there is an actual resolution to the conflict then we think 6,900-7,000 would be the more extended rally zone.

While yesterday AM, before the 5-day tweet) we saw 6k as a wash out level, it appears puts were closed up yesterday which has alleviated/reduced our negative GEX Apocalyptic downside view. This put closing could certainly only be temporary, but for now we see ~6,300 as a “wash out” level, assuming things in Iran don’t materially escalate. The barometer for “material” remains Crude, and we generally watch <$100 oil as our level for “things are relatively ok” and we can hold 6,475, vs Crude > $100 which will be the “oh sh!t” downside (excuse our French).

In yesterday’s Q&A there were a lot of questions regarding “how do we know if this is real?” with respect to the ~3% bounce from SPX lows.

We looked at two things:

1) Vols

2) Options flows

In regards to flows, HIRO showed the most positive flow into financials: banks, mortgage cos’ etc – likely due to the calming of rates after a vicious pop. That was about it for bulls (which isn’t great). The fact that it was really only fins getting bid – and not the beaten down tech sector – suggested a lot of the SPX pop was vol/vega driven.

An example of this bullish financial flow comes from XLF, where a trader sold 15k of the March 31st puts to buy 11k of the March 31st calls (see FlowPatrol here).

What about vols?

While this AM’s vols are still under that of Friday night, they are clearly bid vs yesterday. Further, our marks for yesterday were from Monday’s close which were the highest vols of the cash session. The read here is the market reacted to the 5-day Trump delay by crushing vols, but then they had to walk that sentiment back as it became clear that “it ain’t over”. It still seems like a step back from Armageddon, which signals to us that downside is still open, but maybe it will be a bit less violent than what was in store early Monday AM. Thus, our view that the JPM 6,475 pin is more of a viable option (vs cascade to 6k).

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