Macro Theme:

Key dates ahead:

Founder’s Note:

ES futures are flat, NQ futures are +30bps.

Resistance: 5,970, 6,000

Support: 5,900, 5,850

There was no major risk-off event over the weekend, and so we think volatility is likely to come for sale into tomorrows 1/2 day and the Wed Christmas holiday. This, the “vanna flow” (decreasing vol leading dealers to buy stock), should lift equities. As a result we are looking for “defined risk” structures to play upside. This includes call spreads, call flies, etc. We opt for spreads vs single leg positions due to possible IV/vol decay. Additionally, because stability is low we will be careful to size down positions to avoid getting a quick stop-out due to jumpy moves.

With that, we watch 6,000 as the big resistance line into tomorrow. If that is achieved, then the JPM Collar (6,055) is likely a pin into 12/31 exp.

A break <5,900 thrusts the SPX back into a negative gamma stance, which signals significant risk.

OPEX served to remove about 1/3 of total absolute (i.e. un-netted) gamma, with 6,000 still the largest strike on the board. As you can see, below 6k put positions (blue) are larger than call positions (orange) which is what we typically see after recent market declines. This informs us that there is some put-fuel to drive equities, which is why the vanna lift could be substantial enough to drive us into the 6k strike.

For the downside, puts are expensive enough now to not be terribly enticing, and the threat of downside doesn’t appear to be imminent (i.e. tomorrow). +50% of SPX flow is 0DTE, so “no threat today” is gravy.

In regards to the possible vol drop, you can see below how elevated SPX term structure is, with IV’s near 14%. In the realm of SPX IV’s this is not terribly high, but based on recent past (and upcoming holidays) its rich (gray cone = 30 day range). Again, we’d anticipate these IV’s dropping lower (into the cone), which would provide a tail wind for stocks.

Not only do these holidays make it tough to carry relative expensive vol, this chart from GS informs us of very strong year end seasonality. This all presents a pretty strong “flows over fundamentals” window for the final week of 2024.