Macro Theme:

Key dates ahead:

 

Founder’s Note:

Futures are flat ahead into OPEX. Trump & Putin meet today.

Today’s OPEX is pretty average in size for a monthly expiration. There is clearly a lot more call value relative to puts expiring today, which is not surprising given equities are at all time highs. We generally look for mean reversion out of expiration, meaning we have a very low IV, call rich environment and so we default to looking for a brief correction into next week as the positions that support the low IV/ATH environment reset.

For today, support is at the 6,470 then 6,450 level. Resistance remains at 6,500. We think its reasonable to get a bit of price contraction post OPEX and into next Wednesdays VIX expiration, with 6,400 likely acting as strong support into Jackson Hole.

Its been a strange 24 hours after PPI comes in hot with the options market priced for perfection (see y’day note). The initial reaction to that PPI print was a bit violent, but ultimately led to an unchanged market – although we’d offer that some pretty large 0DTE flows were active including Captain Condor & the QYLD roll. Adding to that is todays OPEX, which can supply volatility reducing flows.

Hindsights aside, the vol signals are offering a bit of a murky picture.

Here is fixed strike vol vs Wednesday night, pre-PPI. You can clearly see upside strike IV has declined (pink box), suggesting traders have sold calls during yesterdays session. This syncs with the idea that 6,500 is likely going to put up a fight in terms of resistance, and that comes as vanna-flows have to be de minimus by definition: short dated vols cant really go any lower. Longer dated vols are unlikely to decline much more due to Jackson Hole and NVDA.

Meanwhile, the downside has a very light bid, suggesting traders did some put buying – or at least (very modestly) repriced downside.

To be very clear the downside IV’s for pre-Jackson Hole are still at ~11-12%, and they are 13-14% 1-month out – that is hardly concerned.

Are these very light equity vols right or wrong? Post-PPI rate cut expectations that are essentially unchanged (via CME FedWatch) and the MOVE bond vol index just cratering. So vol is dead across nearly all major asset classes.

Ultimately right or wrong is not the question. The question, as we discussed yesterday, is “what’s the risk reward of being short options/vol at these levels?” The answer to that is “terrible”. That doesn’t mean we are pitching going all in on put options, it just means that there is a fragility under this surface, and so you must be ready to adjust accordingly. We’d also add that any downside pre-JHOLE would likely just be a “spasm” a la 7/31 and not a bonafide selloff, because traders are treating the pre-JHOLE period as particularly risk-free (Powell can’t hurt us until then).

We also have to respect both sides of the situation. We had been pitching this idea of the Zombie market if inflation readings were benign, then Powell would get a softball cut and markets would grind into Sep FOMC. MOVE and rate expectations don’t care about that PPI – and who are we to argue. Plus, imagine if Trump gets some kind of a legitimate peace deal out of his meeting today…well then that is another excuse to squeeze vols to 10% and go “full Zombie”. The good news about this “best case” scenario is that you can but 1-month 25 delta SPX calls for 10% IV…so its easy to hedge that scenario.