Macro Theme:

Key dates ahead:

 

Founder’s Note:

ES futures are flat, NQ futures are +40bps, which is a nice swing from overnight lows of -2.5%.

We wrote the above 10 mins ago, but now ES is -1.54% and NQ -1.2 %.

The problem here is the credit market. When credit market breaks down it brings forced/price insensitive equity volatility (put) buyers. We are not going to pretend to understand exactly whats happening with credit, but we know there are credit market issues when our X feed is full of “basis trade” hysteria – a week or so ago we told Matt Khors that (paraphrasing) “the worst crashes are related to credit markets, and we’ll know there is a credit market issue when our feed is dominated with these discussions”.

While there is likely a lot of rumor and speculation mixed in with whatever is actually happening – look no further than 10Y yields (+60bps in 2 days, after -50bps in 2 days) to see somethin’ ain’t right…

What does this mean for us in options/equity land? Quite frankly – nothing different that how we’ve been operating. To be clear, on Sunday Night & Monday AM we put out notes detailing the idea that we are all simply volatility traders now, and “levels” don’t matter. Its about flows, and until volatility sellers come in there is no “all clear”. We don’t reiterate these statements to be self-aggrandizing, we state them because in this environment we believe that not heeding these warning signs can get your account killed.

The way that we I.D. vol selling is through the fixed strike grid, below, and

HIRO

flows – specifically looking for large long dated put selling.

There is obviously still no relief in fixed strike vol – and this is not complicated to monitor. Enter “compare” mode, and compare today’s current value vs Friday night (4/4) when the tariff crisis escalated. If the numbers for expirations (Y axis) out past 1-week are red and down more than 2-3%, then we have signs that vol sellers are coming in. Anything less that that, or if you see green in the matrix (like today), then you know IV’s are actually higher irrespective to what the VIX is telling you. Higher IV’s mean risks are higher.

The VIX is a calculation based on these SPX options prices, and the VIX change can often times just reflect skew (that is SPX price moving up and down) – not actual IV changes. More simply stated: “VIX can be noisy”.

Further, as we pounded the table yesterday, liquidity is HORRIBLE, and so small orders, or forced hedging flows, can move markets A LOT. So the 5-10% rally over, say 10-minutes, is a more likely a function of a total lack of offers instead of real-money buying. Poor liquidity increases volatility. If VIX comes in under 35, then it signals stress is actually coming off, and liquidity should start to improve.

How are we trading this?

1. When in doubt DO NOTHING
2. If we get ridiculously huge rallies, into that energy we will be looking to re-enter new short call spreads and/or call flies in line with our Sunday Night note, and Monday AM (bottom of note). The call spreads/flies we had on to start the week closed profitably on yesterday’s equity drop.
3. There are some interesting put 1×2 or broken wing put flies that are showing up. We are short on time this AM, but vols are getting so high that you can go out +8 months in expiration and enter things like (these are ballpark strikes, numbers are changing very fast this AM) +1 of 300 strike SPY put, -2 of 200 SPY puts for a credit. If SPY goes <150ish (for example) you lose…but if that happens we are all likely in some serious trouble, regardless of capital in our trading accounts.