Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are +35bps, which is +100 handles from the lows – however this remains very unstable.

TLDR: We’ve struck short vol positions via upside calls, and are happy to wait this short term volatility out. We continue to look to sell put skew via 1×2’s into big downside moves, and 1-2 month calls/calls spreads can also be sold into high-velocity upside moves, as IV’s currently remain elevated. Yes, this implies we think the volatility is going to start shifting from “record vol” to just “high vol”.

On the “high vol” topic, IVs are now back 1-2 vol points higher than our anchor date of 4/4 – and we are referencing +2 month out options.

So, what stage are we at? Fatigue.

We are hearing that term a lot these days, and it makes us wonder: at this point most investors & funds have made adjustments to the uncertainty, and there is probably a lot of “withdrawal” from this uncertainty. Meaning, many investors are thinking: “Do I actually have a trade here?” And, if you so, is it worth the stress? We also wonder if there still is a record short position in the market (we think not)?

The fact of the matter is that, despite the shock and awe, the S&P500 has not ultimately gone anywhere in the last 2 weeks. This is indeed one of the widest 2 week trading ranges ever, but the fact remains that for anyone with a view out past a few weeks, not much has ultimately occurred. Further, even though it is flat over two weeks, one can’t but help feel like a trap door can open at any moment.

We’re all now well aware that this is record volatility, certainly with respect to anything post-Covid, and historically significant going back to the GFC. 5-day realized SPX vol is 85% (!!!), with 1-month 45% (!!!), and we think this starts to come in because investors are likely to stop being so reactive to the not-so-useful tweets and headlines, as we’ve all started to adjust to this new short-term normal. 50-handle moves are now “boring” – don’t wake me up for anything less than 100!

The big point here is that if the actual whipsaw starts to cool off (i.e. realized volatility), that should allow implied volatility to cool off. If that happens, liquidity improves, which helps to reduce volatility. If the short flow was drained off, that too reduces some forced order flow.

“Headline fatigue” may also start to become a legitimate thing, and single stock focus may pick up into earnings.

On Monday of this week, which feels like 3 life times ago, we discussed that “gamma by strike” had to take a back seat to IV’s & live flow (i.e. HIRO) as our core trading guides.

We still hold that core belief, but we are seeing a strengthening of the positive gamma at the only two levels we’ve provided over the last week: 4,800 downside and 5,400 upside. Specifically, there are some pretty large dealer positive gamma strikes from a wide range of ~4,500 – 4,800, which, together, should serve as some support. Use this support wisely: if the basis trade or whatever credit market blows up, these downside support levels likely get steamrolled.

To the upside, the positive gamma range is quite wide, but it is a function of traders selling calls in the 5,450 to 5,850 range. This suggests that while we can still get illiquid headline reaction death-spikes up into 5,500, the persistent options dealer flow should be futures selling to that rally (i.e. rallies continue to be unstable).

In these zones is where we continue to look to strike short volatility trades via call/put spreads and/or 1×2’s, essentially on abet that the market settles down some, and volatility steps back from the cliff.