Macro Theme:

Key dates ahead:

Founder’s Note:

ES futures -1.5%

Support: 5,900

Resistance: 6,000, 6,020, 6,050

ES futures are down 2.85% from Friday’s 1pm ET highs, revisiting the same level which marked the lows on Monday 1/27. Recall that Monday was also down 2-3%, which also showcased the single largest 1-day single stock market cap decline ever (NVDA, -16% +$600bn).

TLDR: Risk is obviously quite high as we break into the risk-off area highlighted on Friday. Today we see SPX tagging either 6k or 5,900 today (+1% move from current levels). Curiously, the 0DTE straddle is a fairly meager $43, or 72bps, suggesting the market is pricing in less vol than we anticipate. Last Monday we saw put sellers step up at 5,900, but so far there is no evidence of similar trading. Until/unless we see put selling (via

HIRO,

TRACE), then we default to looking for a tag of 5,900. If/when put sellers show up, we will consider a play upside 6,000-6,020.

Vols, interestingly, are also back to the same spot they were on Monday. We can see that via the fixed strike grid, SPX with March downside (for example) only about 1/4 vol pt higher that Monday’s 1/27 close. This suggests that the current selling is more of a come-down from exuberant highs rather than a view into the abyss.

The problem here is two-fold:

1) Its clear now one knows what to expect on the tariff front. Accordingly, no one really knows how to price/value equities (or maybe even rates). With equities just off ATH’s & DeepSeek perplexing AI valuation, its hard to say equities are “cheap”.

2) As we wrote on Friday, options positions are were bullishly stretched (ex: record-low Correlation), which provides embedded risk (read here).

This is like Friday, August 2nd wherein risk was simmering but not at a boil. One little shove from here, and we could quickly be at 5,800 with a VIX +30 (i.e. Aug 5th). We also get the feeling that the market doesn’t appreciate the potential vol jump to the downside, as evidenced by 0DTE prices and flat fixed strike vols. However, buying outright options here are also not cheap.

To play an upside rally, we will be looking at structures call flies – cheap trades that benefit from a rally but also aren’t taxed by IV contraction. And, lets face it, one positive tariff headline and equities are bound to rip back to the 6k’s.

To the downside, also a more that viable outcome, we’d argue the safe expressions are put spreads (selling a farther OTM put to offset high IV cost), or more aggressively put 1×2’s (short -1 ATM and +2 OTM). The aim of these 1×2’s would be to profit should downside truly go convex (i.e. VIX 30).