Following up on last weeks overview:
Indices put up a massive rally early last week and spent the rest of the week digesting the gains. Going into Monday, SPX continues to sit near ATH, with NDX recovering the mid week pullback last week to trade near recent highs again (although still ~3% off making new highs.) Lots of inflation data later in the week so unlikely to move much until then. Markets so far not concerned about oil perking up again following more Iran headlines given no follow through on military action.
SPX short dated implied vols down to summer lows with weekend straddle going out Friday ~50bps. Rolling VRP in slight negative territory after the huge rally we’ve had.
Looking at cross asset implied vols, almost across the board lower into eow after weak NFP data. Equity vols dropping to ~2 year lows last week after decent earnings & inflation concerns fading slightly.
25d SPX skew flattened fast after Friday/Monday rally. Trading near 2 year lows. Once again we saw extreme upside move over a few days that dwarfed any downside we’ve had recently… Notably skew flatter on call side perking up as I imagine funds caught chasing into the rally.
Looking at intraday price action:
Short straddles took a few hits lately on the 7% SPX rally in just 3-4 days. Unhedged straddles pnl down few % pts from highs, however, due to how ‘trendy’ the moves were, short delta hedged straddles managed to squeeze out positive for the week. This has been some of the most one sided intraday price action in recent history (see Variance Ratio section.)
Looking at the straddle cross-section, given the massive rally, seeing all periods up last week. Last hour momentum trending higher since Feb/March but nothing close to the momentum we saw last few years.
Overnight performance continues to be positive, US cash session saw pullbacks as markets digested the gains.
Realized vol measures ticked up from the upside move, cl-cl measures higher but intraday range based measures showing realized intraday volatility near recent lows.
Tech led the rally last week but equal weight indices continue to make new highs steadily. After earnings average component vols dropped from mid 50s to sub 40 (VIXEQ). Short dated correlations continue to trade in single digits, helping push spot VIX towards 15. With weak NFP print (although likely attributable to post World Cup job loss) and CPI likely in line this week, Iran escalation remains the only ‘visible’ catalyst on the table for meaningful downside.
VX30 ETPs made new highs into last week after positive tech earnings & weaker NFP data. Term structure remains in very steep contango, Sep-Dec contracts trading at a 3-5+ pt spread, giving decent cushion for any contained equity downside.
As expected, calls have performed exceptionally well across time frames last week given how sharp the index rally has been. 1-DTE calls up ~200pts since July 31st. The only negative period for calls was last 2 hours, losing ~23pts (last 10 mins calls lost ~15pts as well.) It looks like the flows are getting front run very early in the day, leaving the last few hours weak as buying pressure drops.
From the following post:
An incredible print last week. Monday/Tuesday had one of the highest Variance Ratio prints since at least Nov 2018. This measures the ‘trendiness’ of the intraday time series as a ratio of 5 min variance to daily variance. Not only were individual daily prints high, this was also the highest 5-day average by a decent margin since late 2018. Bias shifted heavily towards short straddles after Monday/Tuesday and we can see markets stuck in a tight range since.
From the following post:
Short VX Aug continues to hold with ~2pts+ of pnl so far. Will roll to Sep contract short on Wed as Aug approaches expiration next week. Tough year overall with many whipsaws but performance back to YTD highs with solid roll set up going into rest of year. As always, best case remains that ‘nothing happens’ for this trade. Not going to try and guess how things going to look months from now (almost all long VX triggers saw short signal hold up to even just few days before) but so far short signal holding and realized vol dropping quickly.
As always, don’t hesitate to reach out if you have any questions / suggestions!
Have a great week!
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