Macro Theme:

Key dates ahead:

 

Founder’s Note:

ES futures are off 50bps ahead of PPI/Jobs/Powell.

Yesterday we spent a lot of time berating the low $35/57bps/21.7%IV straddle. The argument for such low IV was that there was 0 data points that day, and eyes were on upcoming events.

And, despite our complaints, that ultra tight straddle proved to be a winner yesterday, as the SPX only saw ~42 bps of movement.

Turn to today: Jobless claims & PPI are at 8:30 AM ET, and Powell speaks at 8:40AM. Sure, you can discount these events because they are “pre tariff deal prints”. But, futures are moving some: currently off 50bps, and were down as much as 72bps.

So – whats the straddle?

$37/63bps/24%IV – ref 5,865 (SPX).

Most of you, at this point, are likely tired of our “implied vol is too low” trope, but its a key dynamic in both price directions for today, and is the lurking risk for markets into next week.

Starting with today, we see no major resistance until the ~5900 area. That has been resistance for the last 2 sessions, successfully capping very strong equity moves. That is $35 handles to the upside, and if all of the data this AM is benign (or even positive), then we look for SPX to quickly tag that level. Should the SPX tag 5,900 in the AM session one would think the straddle would easily mark a gain as 5,900 is +35 handles (i.e. the current straddle price).

To the downside, we see TRACE showing some fairly strong positive gamma support at 5,800 – most of which is tied to today. That is 60 handles of downside from here to 5,800 – nearly 2x the straddle. You could argue a “bad” PPI would be ignored – but would a “bad” Jobs number be ignored? Add in Powell – all before the open.

And, ignore the data catalyst, we’ve already had an overnight move larger than the straddle.

The fact that the straddle is only pricing in 63bps of movement presents a dynamic of potentially “jumping” vol higher, because if there is a sharp move those that are short vol at 24%0DTE IV have to suddenly reprice higher. They cover, or aggressively hedge, and that invokes more directional movement. Its a feedback loop. To the upside its likely not a “doom loop”, because the best we get today is “the data didn’t mean much”, but to the downside things could be more chase-y because traders are pricing things to perfection.

What about outside of today? The feedback loop works over larger timeframes, too.

This is current 1-month SPX skew (teal) vs that of early Feb (gray). We chose early Feb because it is the last time the SPX persistently held ~50 bps daily ranges (near what the market currently prices). In Feb, the SPX was ~3% higher, at all time highs.

What we see now is that the SPX ATM IV is mildly higher, but now the put skew is essentially the same, the (deep) put tail is quite a bit lower, and the call tail is higher. In other words, traders seem to be positioned for taking out ATH’s. This at a time when the SPX is up ~20% over the last month, and just 3% from all time highs…If that skew twist reverses (calls sold, puts bought) then the vol maybe jumps as traders return to normalcy.

Lets look at the single stock space. Our Compass shows that single stocks are now making call-weighted highs, as shown by the move to the lower quadrant of the grid. Keep in mind, the Ranks are based on the last year of data – and so we are unlikely make new IV Rank highs because of the calamity of early April (recall that in early April all of these stocks were packed to the left side of this chart – which made sense given the waterfall price action).

These current high call vs put values (i.e. high Risk Reversal rank, x axis) are now marking as quite elevated. Again – we hit all time highs only a few months ago – and so we are now registering high call skews against that time frame. Another way of thinking about this: do you want to buy expensive calls after a 20% rally, just 3% off of all time highs?

Finally, we leave you all with this chart. This is long term weekly US equity call volume – put volume (h/t to Bernard Goyder @ BBG). The black lines are our crude markings of “spike highs” in call volume-put volumes. The forward returns from these periods appear to be pretty poor – with the last such spike being OPEX week this past Feb, the weeks where stocks made ATH’s.

That Feb OPEX unleashed a -10% SPX move – and while we aren’t forecasting that type of move (our lower bound is SPX 5,300) – we are definitely looking for some consolidation.