Macro Theme:

Founder’s Note:

Futures are up 10bps ahead of VIX Exp at 9:30AM ET, then NVDA earnings at the close.

Support is at 5,910, 5,900 then 5,850. Resistance is at 5,950 & 5,960.

While the geopolitical situation has not further escalated, it unfortunately seems extremely sensitive. As per yesterday’s AM note, should conflict significantly increase put buying would likely increase in kind, which could sharply expand volatility.

Turning from tail risks to certain events & NVDA’s report.

Heading into today, we have been favoring Jan NVDA calls, and more recently Jan SMH calls (due to low call IV) as a way to express equity upside.

This AM we see NVDA with a 7% implied ER move, a neutral Skew Rank of 0.6, and a subdued IV Rank of 38%.

Premarket NVDA is 147, which is pressing all time highs of 149.77.

Below is 1-month skew on earnings day for today (teal) vs the previous 3 reports. Over those last 3 reports NVDA had 1-day moves +16% (Feb, yellow), +9% (June, blue), and -6%. (Aug, gray).

What is interesting here is that current 1-month skew is at lows vs recent ER reports. Further, skew is quite flat, which shows that traders do not have the same exuberant expectations vs the ultra-bullish Feb stance. We’d note that 1-month ATM vol is 58%, pricing in just 3% daily moves for NVDA.

The focus of earnings reports tends to be 1-day moves, but we want to highlight what a trigger NVDA earnings are – not only for the stock itself but for the overall market.

Note the extended NVDA moves after this years earnings: Feb +43%, Jun +46%, and Aug -21%. Along with that are massive SPX moves which seem to trigger from the prevailing NVDA ER reaction.

Our broad stroke here is that we think traders are underpricing volatility into year end. We think this is a “crack up or break down” moment as either NVDA takes the legs out of the market near highs (remember NVDA is the #1 largest stock in the world), or it kicks in heavy call-driven reflexivity. We believe the massive Dec expiration is also a major factor, as 12/20 exp positions could reinforce a directional move, too.

On this point, we’ve been pounding the table that if NVDA earnings are strong it should re-ignite the semi/AI “meme”, which could marry up with the “Trump Meme” (ex: TSLA, PLTR, crypto) to force equities higher into year end. We don’t know if NVDA earnings are good, but we do believe that the upside is underpriced in that scenario (which is why we like SMH calls). Below we’ve posted raw gamma-by-strike, and we see there is positioning wanes >160 (+6%, interestingly in line with 1-day implied move), which would be our initial upside target. However, the bigger idea is that we’d anticipate that positioning to change sharply on a positive report (note those massive longer term moves out of previous ER’s), and we think the market is underpricing that potential.

One could make the same case for downside movement, too. There are plenty of positions down through 120 – a full -20% from pre-market levels. As a result we don’t read an “oversold” condition until <120. As we touched on yesterday AM, in the worst-case (but realistic) scenario of an NVDA miss + Russia/Ukraine uptick things could get very ugly, very fast. We think SMH or QQQ is a solid proxy for those playing an earnings miss.

Stepping back to the larger picture, our current stance has us long of equities >5,900, Jan +SMH calls, with some downside S&P hedges having been added yesterday. These hedges are for the aforementioned “worst-case” scenario (or a version of).

Should the SPX break <5,850 we would flip to a short position.