Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 20 bps ahead of 9:30AM EST VIX expiration and 2PM FOMC.

Watch for unusual market movements around the cash open due to VIX expiration. We don’t expect VIX expiration today to have a ton of impact given the hedging around FOMC later in the day.

Traders are pricing in a +80% chance of a 25 bps hike.

7,600 remains the battle line, with the SPX testing below that level yesterday to 7,575. Market makers continue to show negative gamma below 7,600, which signals an area of high risk.

For VIX expiration here is our breakdown:

42% of total VIX options positions expire today, with market makers losing a fair number of short upside calls. After expiration market makers will holding largely the same net short call position, but at about 1/2 the size.

The SPX vols are holding steading into FOMC, with today’s 0DTE straddle pricing in $54/71bps (ref 7,600) of movement. We can also see the SPX term structure reflects the relatively high volatility being anticipated in today’s session. 70bps of expected move is hardly excessive given the expected shifts in policy today.

As far as positioning into this event, we see that traders are still bidding the bond ETF put skew (hedge against higher rates), with TLT put skew at 50th %’ile. We also note that SMH carries a heavy call skew, suggesting traders are now watching for a right tail move in the semis. More plainly: traders don’t seem that worried about a rate breakout here, and are positioned for a tech rally. On this topic we do have to give a nod to bulls as this market continues to shrug off the oil/rate risks, with traders believing these pressures will be short lived. Agree or not, we do have to respect the chances of a sharp upside move into Nov elections if traders can get a glimmer of macro-hope. The odds of a rally increase if SPX can hold 7,600 today into tomorrow.

Iran aisde, Warsh today should either soothe rate fears, or he risks worsening the rate outlook. With the former, we’d expect correlation (COR1M) to drop sharply, and dispersion to increase as traders pile into upside tech bets. Conversely, if rate anxiety increases then we likely see vols increase for both Index and single stock options, which shoots correlation higher. In either case, we think tech IVs should increase here, which could be bumped by an increase in realized vols as we touched on yesterday. For reference, QQQ has an IV Rank of 24 (mildly elevated) and a Risk Reversal Rank of 27 – no one is really positioned for that upside index move.

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