Macro Theme:

 

 

Founder’s Note:

Futures are -25bps after escalations in Russia/Ukraine. We also note a pop in vol, with the VIX at 16.65.

We’ve been harping on the lack of put protection in currently in place, but if Russia decides to respond/escalate, that would most certainly spark demand for long equity puts and/or VIX calls, which would in turn generate negative dealer gamma. That allows for downside movement in equities much more volatile – contrary to the “slow”/limited downside we saw Friday. Accordingly we are now flipping to risk-off on a break <5,850 (vs 5,800).

Key Levels for today: resistance is back at 5,900, support at 5,850, then 5,800.

This mornings setup does read much like yesterday, with strong positive gamma, against elevated IV. As such, we think the SPX likely slides back up into that 5,900 level as vol contracts.

As vol is reacting to escalating geopolitical issues, we also arrive at VIX expiration, tomorrow AM. That makes today the final day for VIX 11/20 contracts to trade. Below is our EquityHub gamma-by-strike data, and you can see that there are large put positions down to VIX 15 (blue bars). We read dealers as net long both 15 & 16 strike puts, and so we think there is some impetus to push VIX back lower today, and into tomorrow AM.

This is interesting because VIX Exp clears out about 50% of VIX gamma – which is to say it becomes less sticky at these lower prices. This could make reactions to negative news more violent. You couple this with any uptick in equity put buying due to geopolitics – that makes for some volatility. Toss on an NVDA miss tomorrow…eek!

While we have no idea what happens geopolitically or with NVDA ER’s, we maintain Jan calls in SMH to play upside. Jan SMH IV still shows as statistically low as you can see, below.

For those looking to hedge some downside risk, we highlight 5,500 as a major, long term support line. Our Trace-backed GEX model for SPX shows

gamma flip

ping materially negative <5,700, with large dealer positive gamma at the 5,500 strike. An increase in put buyers would shift that negative gamma flp point higher (toward 5,800). Our key insight with this is that traders likely underprice this sharp of downside scenario, making longer dated >=5% out-of-the-money put spreads decent hedges.