Macro Theme:

Key dates ahead:

 

Founder’s Note:

ES futures are -25bps, with no major econ data on tap for today.

TLDR: We have yet to see a capitulatory type downside move, but the VIX complex seems to be on the cusp of implementing such a downside plunge. For this reason we recommend strongly against being short puts/short vol. Those wanting to play a bounce may want to focus on call spreads.

Amongst the macro drama, we have a large Captain Condor today, with +10k of the:

call spread: 5,905 x 5,910

put spread: 5,780 x 5,775

This size is +2x that of yesterday’s condor, as this trader(s) “double down” in size if their previous traded loses.

These spreads are highlighted via black boxes, below. We note that size of +10k may to be correlated to decreasing volatility, although this macro backdrop is much different then we’ve seen in the past year.

More importantly, we see the TRACE map reflecting light positive gamma (blue), with some dealer long put positions around 5,750. Granted, this is very light positive gamma, but its somewhat surprising given the negativity in the equity market.

Where are the long puts?

This is the SDEX index, which measures a 1 std dev OTM SPY put vs an ATM (i.e. how much is a decent downside hedge?). As you can see, we are “simmering” but well off of major highs like Aug 5th and Dec 18 (FOMC). In a way, it corroborates the lack of negative gamma depicted in TRACE. If there were big dealer short puts the gamma would be negative, and skew/IV’s would likely be higher.

The point is, I don’t think most of us, myself included, would think the SPX is down +5%, how at fresh lows, over the last ~10 days.

ATM IV in the S&P is waking up (blue line), which its in part forced to due to the active realized volatility (1-month realized vol [RV] is 14%, with 5-day 19%). We do see a fairly significant volatility premium (spread between blue & red lines), which was not the case earlier in Feb. The takeaway here is that its the “put wing” (i.e. tail protection) that has a lack of bid.

This does smell a little bit like ’22, when the equity market declined 25% over the first 6 months, and the skew/SDEX went down over that same time. The argument there was that traders were simply selling their equities rather than trying to hold them & hedge. In this case, too, one could make an argument that bonds are a viable alternative.

The second source of hedging flow is the VIX complex. Yes, the VIX is linked to SPX options, but traders may resort to using VIX options as more of a pure “volatility” hedge.

The VIX is at 23, which is its highest point since the Dec 18 FOMC, with a high premium to SPX RV. This informs us that the VIX complex is starting to warm up, after we have been suggesting it was “sluggish” for the last few weeks,

Below we’ve plotted VVIX, which is the “VIX of the VIX”. Essentially its signaling OTM VIX call demand, and you can see its starting to “break out”.

We don’t really see VVIX massive highs (Aug 5, Dec 18) until an actual event/vol spasm has occurred – something like a “vol topping” signal, which could coincide with equity capitulation.

Below compares the 1-day VIX pt change to 1-day change in SPY (%). The last 5 days are in red. As you can see, its with SPY moves <-2% wherein the big, historical VIX moves take place (i..e. +10 pt changes).

Nothing says we have to have a final capitulation, but our issue here is we do not see a reason for this risk to clear. Possibly Powell on 3/7, but the tariff rhetoric is only increasing. Further, a very large March OPEX is still weeks out.