Daily Note:

Futures are flat overnight, holding 4050. Key levels remain largely unchanged, with resistance at 4050/4060(SPY405), then 4100. As Powell is on deck today at 2PM ET, we must include further resistance lines above at 4148. Support below is at the major 4000 strike, followed by 3960(SPY395)/3950 & 3900.

The main takeaway on the positioning side was the apparent addition of calls to S&P strikes above. These calls were likely sold into yesterdays AM pop, as implied volatility was very rich. We saw a +7% increase in SPX call open interest, and -2% reduction in put interest. Further, skew remains very flat with our risk reversal at -.04. Understandably, the CPI did nothing to add fear to markets.

Yesterdays fade seemed leave many scratching their heads, but made complete sense through our options lens. Options prices were so very high that, once the event(CPI) fired, it made the move collapse on itself (see yesterdays AM note).

Further, to quote Goldman from last night: “We saw very little real money being deployed by the system.” This makes sense, because its unlikely big money would jump the main FOMC event today.

The somewhat ironic part here is that todays 0DTE ATM 4025 straddle is currently $68. The 0DTE straddle was $100 yesterday – with the ATM strike being 4015. So, despite the $100 straddle price yesterday, the market moved roughly 15 handles over 24 hrs and now…suddenly expects a much smaller move.

We say this is ironic because it’s actually Powell that is going to determine the path of asset prices going forward.

In line with options pricing in a ~1.5% move today, vs a ~2.5% move yesterday, the entire SPX term structure has shifted lower. The market is pricing in lower future volatility now, as the assumption is Powell may be less aggressive on rates.

As we noted at the top, the change in positioning overnight was on the call side. Whereas we had a balanced call/put position yesterday, the position has now tilted rather heavily to the call side. You can see this in the total SPX+SPY+QQQ+NDX deltas by expiration below.

Our net takeaway on this is the following:

While we have no idea what Powell will say, we continue to give edge to the idea that the large 12/16 OPEX will function to suppress volatility – particularly to the upside. The positions are fairly think in the 4100-4200 range and we still feel comfortable with a max upside of 4200 into 12/16.

To the downside, markets should have some support into 3900. This means that mean reversion and/or options flow that supports equities is likely in place. If we close down into the 3900 area today, then traders need to likely anticipate higher relative volatility for Thursday and Friday (the OPEX pinning function is removed).

Below 3900 things could get squirrelly, as dealers may flip to a negative gamma position which helps push downside price action.

Further, we get the sense that the market may now be underpricing volatility into the year end. This could be particularly true to the downside, as the market appears under-positioned for a downside surprise.