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Founder’s Note:

Note: There will be no PM note tonight. Enjoy your long weekend!

Futures are off 30-50bps.. PCE is out at 8:30 AM ET. Its also month end, which we flag because that seemed to time with some selling in July.

TLDR: 6,500 is the biggest 0DTE strike on the board, and a good to in line PCE likely triggers a rally back to that level. If PCE is a miss, and the SPX breaks <6,450, then we’d look for a quick test of 6,400.

You make care about the PCE today, the market does not. SPX Fixed strike vol is flat this AM (vs light night) even though futures are off 30 bps and PCE is in an hour. Keep in mind these are <10% IV’s…so they really dont care.

The take here is that if PCE is a “nothing done” then SPX should push back to unchanged into this 3-day weekend. The curve ball is if the PCE is a major miss. The market is indeed unprepared for that – and any break <6,450 is risk off, as it likely leads to a test of 6,400.

The backdrop here is a 3-day weekend, and so it has to be quite ugly to force traders to own puts into that 3-day decay.

The 6,500 you can see here – its 98th %ile already and so if the SPX rallies a bit it becomes the 99th “magnet” for the seek and destroy algo. From 6,500 all the way to 6,450 is + gamma, which is why we see safety in this range. Below 6,450 you can see the hole to 6,400. On this point the 0DTE straddle is $23. Indicated SPX prices are 6,485, so 6,485+23 = 6,508. Our fair value top is 6,500…so the $23 straddle seems fair to a bit rich if we rally. To the downside, first check is 6,450 which is $35 below, and if things are really nasty then its an easy 85 to 6,400. Given this, you could make the argument that 0DTE puts/put spreads/put flies are not a terrible bet. Low odds of hitting, but if they do they can pay.

Zooming out, the downside case is unchanged: 6,450 breaks leads to 6,400. <6,400 we look for 6,300.

Upside: quite frankly no one wants calls. You can see this via the Compass with all sector ETF’s in the bottom left. We’ve been making the case that this could be a chasey period as SPX realized contracts, which leads to implieds contracting and that keeps SPX stable and grinding higher. This can force some people to chase risk into Sep OPEX, buying single stock/sector calls. The fact that people aren’t positioning for upside is a good signal for bulls, as if they change their minds it could bump stock prices. Our base case here is QQQ & IWM rematching previous ATH (+1-2%). For SPX its 6,550 and 6,600 as upside targets into Sep.

On the topic of downside hedging, we really like deep OTM SPX put flies. There is some path dependency to their payouts, but placing the first buy leg at some decent downside target like 6,200 or 6,100 (depending on time to expiration) can produce really nice payoffs. Granted, these are low odds (this market hates downside), but for ~75 cents you get a peak payout of 100. That being said, getting a pin on the downside is quite tricky, so we look at these as something we can monetize for a ~10-1 payout if downside occurs. Again – low odds, but pretty cheap to carry.

Here is a 9/19 exp 6,000 x 5,900 x 5,800 put fly, and the reason we structure so out of the money is because if the market does slide, we want to he movement of the 6,000 put to drive the spread price higher. If you were to place this higher (ex 6,300 x 6,200 x, 6,100) then the 2 short puts at 6,200 may initially jump a lot more in value relative to the 6,300, hurting the initial PNL.

Obviously if you go closer in expiration you can slide all these strikes higher.