Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are more that 1.6% lower, with no material news on the tape.

Data from several banks shows us two things:

• There was all-time record US stock volume y’day
• Goldmans short stock basket was up 13%, suggesting a massive short cover was forced into that rally.

Entering into yesterday their data suggested Funds were (or wore?) “Big Shorts”. So, you plow a huge forced short cover into a big negative gamma situation + vanna/vol cover and what do you get? The 3rd largest 1-day rally in he last 35 years!

What do we all know about short cover/forced-flow rallies? They are not stable.

We do NOT think this means the market rolls over back to <5,000, and VIX rips back to +50. The credit market was clearly wobbly yesterday, and the tariff pause brings some relative come to that sector, which takes out a forced put/vol buyer. Additionally, despite the VIX being back to 37 this AM (the <30 y’day was “Fake News”), we think liquidity will start to improve, which will bring realized vol back to earth – or at least outer orbit.

From a risk perspective, we are not entering a middle ground as the heavy-risk smoke clears from the last few days, but we still have China risk. We don’t know much on that topic, except that China is obviously a HUGE piece of this tariff/geopolitical puzzle.

This, again, is why our weapon of choice to sell volatility was via upside calls.

Moving on…

Oddly, in last nights note we mentioned the 5,400 – 5,500 area positive gamma that started to form, as it looked like traders were selling calls in that zone. This morning TRACE shows us that those positions are all gone, or at least being dominated by new negative gamma positions. This informs us that there is no real level to grab on to right now – but we do suspect that the 0DTE crews will start to re-emerge intraday, forming some clusters of 0DTE positive gamma support/resistance.

We are today eyeing 5,300 as a possible support strike due to a pretty chunky put-spread at that level. Should the S&P test that level, if

HIRO

turns higher it will increase our confidence of short term support.

Lets finish on the volatility complex, and why the VIX <30 was misleading.

Below is 1-month fixed strike skew for the SPX on Tuesday’s close (high tension) vs yesterday (post the pause) and today.

Yesterday AM we were essentially at the 43% IV (red star), and after Trumps tweet we went to 25% (green star). The starts are essentially representing the options prices most heavily weighted in the VIX (the ~at-the-money SPX options, 1-month out).

The vols clearly deflated after the positive news, which is the ~4pt vol shift which is seen from the space between the Tues (gray line) to the Wed (yellow line).

But, notice that there is a very heavy slope downward of these skew plots as the SPX price goes up – that is because puts were heavily bid and calls were not. So as the SPX rallied nearly 10% in one day, the main input into the VIX slid down that curve to the green star. That “slide” was responsible for at least ~9 vol points (slide the red star down the gray slope to just above the green star). In other words: 2/3 of the VIX decline could be seen as a function of the SPX having its 3rd largest rally in the last 35 years.

Great – how do we play this now? We think that trading <90 index (SPY. QQQ) vol makes sense, by selling put flies, condors, etc makes sense. This can be particularly true into bouts of weakness, at it will lift vol.

Additionally, we favor selling put flies on single stock names – but largely NOT selling puts/put spreads. This is because many single stocks are entering into earnings season, and so a pure IV crush may not be as likely. Selling put flies or 1×2’s seeks to exploit the heavy put skew that has been prevalent.