Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are flat ahead of Jobless Claims and PPI.

TLDR: Boring data & we likely test 6,490, and that is likely it for today (we always default to assuming this in-line scenario). Hot/bad data and 6,440 is likely the first stop, but things could get a lot more spicy than that. We are taking a small 0DTE long straddle lotto play today, as well as maintaining the sliver of 1-month SPX puts & VIX calls.

Despite these AM data points, we see short dated SPX IV’s in the absolute gutter: the 0DTE straddle price is just $22.5/34bps/13.58%. I can’t recall having seen a 0DTE IV this cheap – I’m sure its happened but not in recent memory.

Further, if you look out at ATM IV’s for the next 10 days they are sub 10% – that is as cheap as it gets.

On one hand, this low IV is was expected (see Monday’s Note) given the “in line” CPI, and higher equity response. That signaled “rate cut!” and meant that IV’s for pre-Jackson Hole could drop because, “hey, its risk free!”.

So, whats the problem? Assuming today’s data is all in line…nothing. That being said, we do not want to be short options/volatility at these prices, and in this ~6,450 price are because, on a 0DTE basis the magnet strikes, curtesy of Capitan Condor, are 25-30 handles away from current indicative SPX prices (ATM = 6,465 & condor short strikes: 6,490 & 6,440). Odds are benign data pushes us into those huge 6,490 levels…Tomorrow is also then likely a low volatility dud as we head into one of the final summer weekends.

What about downside? Any miss in today’s data, opens us easily to 6,440 – but – it also likely causes a jump in not just today’s IV, but also longer dated IV’s (i.e. those “priced for perfection” 9% vols highlighted above).

Any other Trump headline or Fed comment over the next weeks can lead to a spasm a la July 31st. Remember: consensus is that a rate cut is in the bag and while we are not qualified to argue against that view, the money to be made betting on the fully priced in outcome is essentially zero. Shorting options/vol at these levels is the fully priced in bet.

Here is the other issue – single stock stuff is now getting pretty rich which reduces the risk/reward. IV is still low, but instead of calls to the upside we are thinking more “call spreads”…

Consider SMH, which we have been touting as the calls were quite cheap 1-2 weeks ago. The IV rank remains very low (options are generally cheap), but now call prices (Skew Rank) have jumped making call skew a bit rich. In other words, its getting crowded.

To be clear here, we aren’t saying dump all of your longs and go full into downside, but prudently managing some risk here makes sense. If today’s data is boring, then we likely get fully over our upside skis into Jackson Hole (i.e. Skew Ranks crowd into the 70’s) and COR1M goes to 10%.