Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are +30bps ahead of PCE at 8:30.

Ahead of PCE, the 0DTE straddle is trading for just $48, or 81bps (ref 5,880). That feels rather light to us given the -1.5% SPX selloff yesterday (-2.7% for Q’s).

While we had a bullish leaning yesterday pre-open, TRACE depicted some nasty downside potential if the SPX broke <5,975.

Today we see a unique setup in that there is a strip of mild positive gamma strikes <=5,850, with negative gamma strikes above. That suggests that this market could have an easier path higher.

We recommend that traders continue watch the TRACE Stability gauge closely: yesterday during the Q&A it was 6%, which foretold of afternoon volatility.

Dynamic 2 here is IV. The “dealer short VIX >20” is still on, which suggests that vol could really pop from this point. This is a risk if PCE is hot, and/or the heavy tech selling from yesterday continues. Framing this another way: SPX was down a mere 1.5% yesterday – a selloff from here would likely be much more “crashy” as VIX could go “convex” due to the dealer short vol position. As we noted at the top, short dated vol seems fairly mild in term of pricing, and so another jump to capitulation is certainly possible.

Lets frame this another way: this could well be something like August 2nd (VIX 20), which was a simmer/warm up to something like August 5th (VIX+60).

To be clear, we think this is going to be a case of PCE “no big deal” and that could release some event vol. As we show below, a lot of major put flow was tied to today’s expiration (discussed below), which may also relieve some pressure. The price for being “long & wrong” is heavy, and so if you want to play long, we think long call spreads and not short puts/short vol.

While the banks are flagging CTA flows as a source of weakness, we flag massive negative delta trading in major tech names, particularly TSLA & NVDA. Consider the end-of-day TAPE snapshot of the largest trades across all stocks. Its nearly 100% TSLA put trades, many of which expire tomorrow. We also saw big call sales in names like META, BKNG, bringing some big unusual options pressure.

One last point:

We spent a lot of time in yesterday’s Q&A discussing 5,800 as a downside exhaustion point for SPX, as dealer delta exposure shifts to ZERO (also discussed in Tues FN). This implies that SPX dealers are not in place to add much short hedging flow until/unless 5,800 breaks.