Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are flat, with no major data outside of 10AM ET home sales.

Trumps positive tariff comments have certainly sparked bullish flows, as the SPX was up 1.7% yesterday. Tech did better with QQQ +3% and Semis +2.6%.

Positive gamma strikes are filling in the 5,700’s, which should offer some support to equities. Our targeted 5,750 high was indeed bested yesterday, leaving the next major resistance strike at 5,800. Major support remains at 5,700, with negative gamma & high risk below that level.

Structurally things look “just ok” for bulls. Positive gamma increasing is good… IV’s, though, are rather sticky due to the looming tariffs.

You can see this via the 1-month SPX skew plots below, wherein todays skew (teal) matches closely to that of last night (gray) and Friday night (yellow). We take 3 things from this:

1) Vol sellers are not necessarily charing ahead, which makes sense because no deals have actually been signed

2) The call wing (>=6,000) is flipping around a bit, likely resulting from the big unexpected up-move yesterday (remember traders were pricing in 60bps of movement and got 170 bps).

As we said yesterday, and reiterate today, buying some cheap downside protection via put spreads or put flies makes a ton of sense. Not because we think deals will fall apart (we have no idea), but because the risk reward looks great. Hopefully many of you caught this upside, so you have some gains to protect, and/or would be looking to snag some alpha should the market be (again) caught off guard to a big move (lower).

The downside due to negative headlines remains 5,500-5,565 into 3/31- 4/2.

But what is the upside scenario? We will be looking primarily to vols as a guide in a best-case move. 6,000 is the obvious looming upside resistance strike due to massive positioning, as you can see below (strike on right side of red box).

If there is a deal signed, traders can arguably remove some of those known-unknowns, which brings some certainty in, allowing IV’s to compress. 1-month realized SPX vol would then likely settle into the 14-15% range, vs 19.5% now.

Historically the VIX maintains a ~3.5 pt premium to 1-month SPX RV. 14+3.5 = 17.5…thats where the VIX is right now….Nothing says the VIX has to maintain that premium, but its unlikely to drop under realized vol. So lets assume VIX 14 is the “best case” (and that is really a best case).

Looking at fixed strike SPX vols, you can see current IV’s for strikes in the 5,800 – 5,900 range. For dates out past 4/2 they are in the high 14’s to low 15s. Tough to argue that a rally into that strike range could materially drop those vols (for a point of reference we rarely see ATM IV’s go <10% – and that is in very quiet markets).

Ok, so it seems like a ~3 vol pt drop is what could get drained from positive tariff news. Using some basic estimates, that 3 point VIX/vol drop should be good for about 4-4.5% of SPX gains, or ~225 handles.

Coincidentally (or is it?), a 4% move places SPX right at 6,000 SPX, which coincides with the massive gamma bar, above.