Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are 65bps higher after news hit that the US & China are meeting Saturday.

FOMC in on deck for today at 2PM EST.

Todays 0DTE straddle is $54 or 95bps (ref 5,640) with an IV of 36%. That feels a bit light to us, as the 0DTE straddle was pricing in 1.1% move & 46% IV into last Friday’s NFP.

• Negative gamma remains the dominant positioning in the S&P500, with much of that supplied by SPY.
• Implied vols continue to reflect somewhere between negative and no risk premium. Keep this in mind when we look at the charts below which suggest we’re in a “stable, higher vol regime”

Both of the above factors are not a big short term deal if Powell comes off as supportive today, and some type of constructive agreement comes out of Saturday. The lurking risk pertains to economic ripples from these tariff deals (“Port Traffic” twitter is now our favorite “Doom Scroll”), as vols are essentially priced for perfection, any less than optimal outcome could have an outsized impact to the downside.

In terms of levels, for today we see 5,5xx’s as support – the specific level is somewhat transient as its mainly 0DTE around 5,550s. Today’s upside may be contained in the 570 SPY area (5,725) SPX (yellow box). On a larger time frame, you can see that SPY negative gamma wanes sharply into 590-600 (green box) and down <530(red box). These are the target zones into May 16th OPEX – after that expiration we would think these levels shift.

Moving on, while we are normally quoting our fixed strike vol metrics, we wanted to “generalize” things by reviewing more naive indexified volatility metrics.

Shown below are VVIX (VIX on VIX), COR1M (equity correlation), and SDEX (SPY skew index). What you will see is that all three are holding near “mean”/sustainable highs – meaning we aren’t at early April levels but we are well above 2024 levels. Our TLDR here is that this all may reflect a regime change from the outlier low-vol market of 2024 to a more normal regime of 2020-2023. The point here is that these vol levels could be sustainable (and a platform for higher vols), and that can change how we think about vanna as an upside flow (we think vanna upside has been burned off – vanna can supply downside pressure on a IV spike).

VVIX: The vol shock of early April moved behind us, but there is clearly still a bid to upside VIX calls. As you can see, the market can maintain this bid as VVIX is at levels it has sustained since the August 5th vol spike.

COR1M: CBOE correlation essentially shows us how directionally “in sync” stocks are (specially it compares single stock IV to index IV). During very bullish periods COR1M drops as traders chase specific stocks (i.e. “buy NVDA ’cause AI”), vs “do I own equities at all”. COR1M is now just back to levels of 2022/2023, suggesting that this current environment is still about asset allocation ie own stocks, or some other asset (even non-US stocks). In a bullish market you would expect correlation to dive as traders try to outperform stocks via stock selection.

A longer term chart of COR1M also suggests that this current period is also more of an equilibrium to pre-24 levels, and the 2024 semi conductor chase/COR1M major lows was the outlier…

Lastly is SDEX, which measures SPY skew (1-month ATM put vs 1 STD Dev downside put). As you can see, this is off of the early April highs but is maintaining relative highs. If traders were really selling put skew, or wanting to sell put skew, this chart would suggest there is room for them to do so. You may also note that this chart mirrors that of COR1M, implying ’24 was an outlier and harvesting put skew is not as attractive now as it was in the ultra-bullish market of ’23/’24.