Macro Theme:

Short Term SPX Resistance: 5,120

Short Term SPX Support: 5,000

SPX Risk Pivot Level: 5,200

Major SPX Range High/Resistance: 5,300

Major SPX Range Low/Support: 5,000

‣ Monday & Tuesday flows could be supportive of equities based on charm + vanna flows. Accordingly, this may be an interesting place for call flies that profit on a move into +5200, as we’ve seen sneaky rallies on the Tuesday before VIX expiration (4/17), as vol could be shoved lower due to expiration mechanics.*

‣ A risk-on window then opens up on Wednesday AM with VIX expiration (4/17), and extends into Friday OPEX*

‣ <5,000 we are on watch for a more significant volatility event*

*updated 4/16

Founder’s Note:

Both ES +40bps to 5,115. NQ futures +25bps to 17,925.

Key SG levels for the SPX are:

• Support: 5,050, 5,026, 5,016, 5,000
• Resistance: 5,077, 5,100, 5,120
• 1 Day Implied Range: 0.6%

For QQQ:

• Support: 430, 425
• Resistance: 435, 440

IWM:

• Support: 195, 190
• Resistance: 200, 205

17 week TBill auction at 11:30AM ET, 20Y bond auction at 1:00PM ET.

VIX options expire this morning, with 1/3 of total positions rolling off. Those positions from a value perspective highly concentrated at the 17 strike, as shown below.

Turning to equities, we’re of the view that 5,000 should now offer material support, and that the clearing of options positions this week could provide fuel for a short term bounce. This obviously assumes that the situation in the Middle East doesn’t escalate.

We think there is fuel for a quick recovery back towards 5,200. Further, as we will lay out below, we think that the recent jump higher in implied volatility has been more about a normalization from a recent period of unusual calm (read here), and less about high fears. This supports the idea that recent declines were more of a correction, than a start of bear markets. Should the SPX move <5,000 we would switch our stance to risk-off.

You get a sense of the potential vanna fuel here from our model, which shows a steep dealer delta reduction when you adjust for a reduction in implied vol. Compare this to the gray line, which is an estimated dealer delta value unadjusted for changes in implied vol. The purple line diving lower informs us that if stocks rally and IV drops, it may add more stock for dealers to buy.

Zooming in on the vol landscape, despite the VIX advancing to fresh highs yesterday near 19.5, we see longer dated fixed strike vol as fairly flat vs Friday’s close, when escalations ticked higher, but before the Iranian strike. The Fixed Strike Matrix below shows that very mild change, with the dark shade of green for expirations in May reflective of just ~30bps increases in vol. Further, we are seeing fractional decreases in vol for strikes >May, as highlighted by the very slight shade of red (red box, lower left).

The trouble with bidding up vol now is that we’re only realizing 12-15% vol, which makes carrying relatively expensive puts less attractive (see yesterday’s note). What remains to be so fascinating on this is that longer dated IV’s are still only in the high-teens – hardly panicked.

While we argue that higher vol is more about a “short cover” vs “fear”, it may be leading to shifts in pervasive flows, and a generally higher volatility regime going forward (from extreme lows). If you want to dive into more around these dynamics, please check out our recent OPEX Effect podcast, and yesterday’s OPEX Live with Imran Lakha.