Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are 1% lower, with NFP and PMI on deck. AAPL is +1.5% premarket, with AMZN -7%.

TLDR: We are into our risk-off levels <6,300, with 6,200 the obvious first line of support. 0DTE put sellers have so-far stepped up into this overnight weakness, and the risk here is that some bad data this AM could run those traders over, which would add to slippery downside. The “worst case” scenario we see unfolding over the next few days is a move into 6000-6,100. Below there positions simply don’t exist, which suggests hedging flows would wane sharply. Conversely, a shift in good news good easily pop things back to 6,400. So, this is a tricky spot. On net we default to looking for downside until/unless 6,300 is recovered.

We’ve obviously been giving edge to vol contracting and the market reaching toward 6,500, which seemed like the setup yesterday AM with stocks at ATH. Markets quickly changed tone, and the VIX is now quickly >18.5…but this is exactly why we own that sliver of cheap puts/VIX calls. We will be looking to monetize/roll those after the open this AM – unless the data is a big miss in which case we will roll those closer to <=6,200.

You can see to the downside of 6,300 is where things get more directionally spicy, as this is where gamma is predominantly negative. Its not hugely negative, but it is negative vs >6,300 is more of a mixed bag. Its also above 6,300 where we’ve seen large 0DTE options sellers step up, which adds local positive gamma (i.e. gamma around ATM).

Vol is unsurprisingly higher, with 1-month IV about 1/2 a vol point up. Thats not terribly large considering the 1-2% decline over the last session, and given the upcoming NFP/ISM data. 0DTE ATM IV is 31%, which is pretty heavy (its been near 20%), but some that is simply due to “skew slide” or the fact that ATM options were near 6,400 yesterday, and now ATM is 6,280 (upside SPX options naturally have lower IV’s).

We’d also point out that the 0DTE reaction to this futures drop has been to sell 0DTE puts, as seen with the large-ish blue strikes <=6,280. The result here is that it doesn’t look/feel panicky, but we can’t ignore the shift from above our risk-on levels >6,300 to our risk-off levels <6,300. As noted above, bad data can catch these traders and force a cover, which can exacerbate downside.

I think the bigger question here is if this is just a correction vs something like July/Aug ’24 wherein equities plunged sharply and VIX went to +50. While there are some overextended things, we honestly don’t see the massive imbalances of that period. For this reason, we remain in the “light correction” camp, which allows vols to reset a bit, and call skews to cool. What changes that for us would be the addition of big put positions and/or large VIX call positions which adds downside fuel. So far, that seems limited as implied by the SPX GEX curve waning into 6,100.