Macro Theme:

Key dates ahead:

Founder’s Note:

ES futures are flat with no major data on the tape for tomorrow.

Today’s 0DTE straddle is just $34/57bps, with an IV of just 21.8% (ref 5,885)! This lack of vol seems to be approaching, well… ridiculousness (more on this below).

We’ve been highlighting the 5,900-6,000 area as the zone wherein the rally would stall. We admittedly thought that would be more of a “late May” test, not so much an “early May” test – but here we are.

Interestingly after the CPI proved to be a non-event, vol initially contracted to the low print, and options flows (purple line) rushed the SPX (white) to that 5,900 strike, at which point those flows essentially shut off.

Our reason for calling this zone the interim high is that 1) SPY negative gamma wanes sharply into that area. You can see that below – although we note a large 600 strike call position was recently added. The lack of negative gamma above 590 infers market makers have less to buy into a rally.

2) SPX positive gamma was starting to build in the 5,900-6,000 area. The anchor point to this is/was the +30k dealer long calls at 5,905 related to the JPM collar (red box) – and that is a position which is only going to grow in gamma size into June OPEX. June Exp is obviously a ways out – but the market is aware of this strike and its a key level to watch.

SPX GEX did change over the last few days, such that it is pretty negative around 5,900 (purple curve). However, after Friday’s OPEX a lot of that negative gamma is removed, resulting in a GEX at the yellow line. This removes negative gamma hedging flows which we believed helped to propel recent rallies.

This potential topping zone comes as the market must now search for a catalyst. There is no obvious near term China tariff update – and one has to think the bulk of that rally has no been pulled forward. With that, vols dropped – and we find they took another big chunk down yesterday. To this point, we now see ATM SPX for expirations >1-week at 15% (or even less).

The risk here (for the ump-teenth time) is that this market is absolutely priced for perfection.

If we are delivered perfection – then, great! But any challenging trade news, econ news, etc will command an immediate vol premium, which plays into negative gamma to the downside. We know that we sound like a broken record on this point – but our job here is to flag the risks embedded in this market. If you were to show us a giant swath of positive gamma just below current SPX levels, then we’d get off of our “high risk” soap box.

At the top of this note we made mention of today’s $34/54bps straddle, with admittedly no major data set for today. Regardless, you almost certainly have to go back to late Jan early Feb to find a similarly priced 0DTE straddle. From a realized vol perspective, you have to go back to 3/25 to find a daily range <50bps, and prior to that it was in mid February that the market consistently held daily ranges near 50bps.

Recall into yesterday’s CPI the straddle was $43/73bps, to which we said “too low” – and we referenced 5,835 for that price.

Why did we say “too low” yesterday AM?

“That low straddle price indicates to us that traders are not respecting the volatility potential of this market. Take current SPX GEX, for example, which continues to show as negative. We continue to see some large positive gamma strikes >=5,900, which is ~70 handles from current SPX levels.”

We quoted the 0DTE straddle at 5,835 in the SPX, at ~7AM ET. As you can see, you would have been paid “all day” to be long that straddle, particularly if you were trading the gamma. In fact, the market high of the day was $78 handles – nearly 2x that of the quoted straddle.

We don’t say this to chest-thump a market call – we say this because the market was caught off guard yesterday, underpricing vol. So you get a small IV contract immediately after the CPI print itself, and then the market ripped after the cash open, creating a chase to 5,900.

When this works to the upside people feel great. When it works to the downside then people are left searching for narrative: “How could this have happened?”

So, for today the market is pricing in a $35 SPX move. From a long term perspective, we have been marking the 5,900 – 6,000 zone as the area wherein we think the market tops out. TRACE shows us a bunch of positive gamma strikes at 5,900, then there is nothing notable until 6,000. Are we saying that we think there is a +2% move today? No – but could we easily do +54bps? yeah. If we instead saw a bright blue TRACE map >5,900, then the idea of heavy upside resistance would more validate the very cheap straddle. Could we just pin to 5,900 be end of day? Definitely – and if the SPX simply pins 5,900 ahead of tomorrow’s prints then the straddle is a winner – assuming there is no intraday range.

What about the downside? There is no positive gamma of until 5,800, which is a -2% move. With the market underpricing vol, a move lower would for IV higher which works to level a downside reaction.