Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are -20bps, with little news on the docket.

Resistance: 5,990, 6,000, 6,050

Support: 5,923, 5,900

Friday saw equities break 1% lower, pushing the SPX below the critical “risk off” level of 6k. GS was pointing to $21bn in “US Pension” equity selling due to the move in bonds.

The move lower has greatly reduced the amount of positive gamma for the SPX resulting in more fluid price action. We now see net negative gamma below current SPX prices, which suggests that lower SPX prices could be met with a further jump in realized volatility (i.e. larger than 1% moves lower).

To the upside, there is mild positive gamma, and we think SPX prices could easily recover back to >=6k, particularly given the elevated IV and upcoming holiday.

As you can see in the TRACE map, the 12/31 exp 6,055 does still hold some positive gamma, but that was greatly reduced with Friday’s selloff. We note that the full ~45k of open interest will very likely exist through 12/31’s close, and so we treat 6,055 as resistance into Tuesday’s close. As gamma is highest for at-the-money options, a rally in the SPX could quickly reflate the 6,055 strike.

The trick in positiioning here is its likely thin holiday/year end trading, and that 6,055 could still invoke large hedging flows today & into tomorrow (as well as any other year-end flows).

With Friday’s selling we saw SPX vols generally up about 1 pt. This certainly has elevated the cost of downside protection, which is now not quite as attractive as it was last week. We are looking to use any equity rally as an opportunity to add to Jan/Feb downside protection. This is due to the removal of the last bit of positive gamma “protection” with 12/31 OPEX.

One quick note on the passing of President Carter. Generally the day of the funeral is a market holiday, and if that holds true here it would likely market a shadow day of time decay for the US options market. We’re not sure if there will be a measurable impact if/when this happens, it would likely depend on vol levels (pausing the market in the midst of a crash would be most impactful).