Macro Theme:

 

 

Founder’s Note:

Futures are 20bps lower ahead of 8:30AM CPI.

Resistance: 6,000, 6,015, 6,050.

Support: 5,950, 5,900

The 0DTE straddle is priced at $33, or 55bps (ref 5,970, IV 20.5%). That is quite low – which we understand is the lowest since Nov ’21 (h/t @Mike_Hunt_Sr).

Adding to this, TRACE data shows we have high Stability, which sources from a high level of positive gamma. Further, you can see that there are large positive gamma strikes surrounding current SPX prices (yellow box). We note a gap in positive gamma from 5,950 to 5,900 – a zone which could be fluid to the downside.

So, the market is priced & positioned for low volatility today. Unless we get a game-changing CPI, we think the market pulls back into the huge 6,000 strike.

This is what CPI vol is fighting: SPX 6,000.

As we’ve been highlighting, is a monster of a strike heading into 11/15 OPEX. We also note SPY 600 as a major call strike (~SPX 6,015), with similar

call gamma

size to SPX 6,000. That 6,000-6,015 resistance zone is also ~50bps (the implied move) above current (AM indicative) SPX prices (5,970). This makes for a pretty clean upside scenario out of a benign CPI.

What about the downside?

As we detailed in yesterday’s AM note – no one wants puts. Additionally, we read the Trump Meme’s (crypto, TLSA, PLTR, etc) as “overbought” (based on IV’s), but broader market call IV’s seem “cheap” (see SMH).

“Cheap” also goes for downside protection, too. As a proxy for that, here are major vol indexes like VIX, VVIX, SKEW, VOLI, TDEX. What you pick up from this is that OTM put indexes (Skew, TDEX) are both relatively high vs VIX & VOLI (more “ATM” readings). This suggests that tail risk prices (puts 2-3 std dev OTM) are still a bit elevated relative to ATM. ATM vol has been eviscerated post elections/FOMC. We’d expect further pressure on those tails – a bit more vanna to squeeze.

Let’s say that CPI is a huge miss. When can things get spicy – not just a big 1-day move, but a series of big moves?

As we noted above there is a huge blanket of positive gamma above, with support at 5,900. As the SPX GEX curve shows below (the same model that powers TRACE), there is no material negative gamma until maybe <5,700. We say “maybe” because what’s currently there is small. The question you have to ask is: what will trigger people to buy put protection, which would increase local negative gamma?

Historically triggers are: 1) credit/rate issues or 2) geopolitics. Either of those could flare up at any time, but betting on them has been a suckers bet. We’d throw one other catalyst out there: poor NVDA earnings next week (11/20).

Does “suckers bet” mean you shouldn’t hedge a bit? No. However it does imply that people are likely going to have to be “forced” to hedge as the cost of carrying insurance has been tough. As a result we have a long way to go from our current position, to a strong negative dealer gamma position that drives downside volatility.

This means that we really don’t see the position in place to spark a selloff, unless a major catalyst is delivered. However, the place where we’d admit “bullish defeat” and start to position for longer term downside is <=5,900.