Positioning and Week Ahead [06-09]

Looking into next week, we have several big events (taken from Investing.com) but

the main event continues to be tariffs. This past Wednesday was the day each country was supposed to update their final offer. So let’s see what happens.

• Sunday (06/08)

  • Japan GDP (1950)

• Monday

  • NY FED Consumer Inflation Expectations (1100)

  • Atlanta Fed GDP Now (1300)

• Tuesday

  • UK Unemployment (0200)

  • BRZL CPI (0800)

  • 3-Year Note Auction (1300)

• Wednesday

  • CPI (0830)

  • Crude Oil Inventories (1030)

  • 10-Year Note Auction (1300)

• Thursday

  • PPI (0830)

  • 30-Year Note Auction (1300)

• Friday

  • Michigan Consumer sentiment (1000)

How significant are these events?

Well, we can use the straddle pricing to see the general jumps in pricing. See below

Positioning into the next week

I’ll go over each topic and summarize how I bring all this together at the end

Topics covered

1. DX & GX Surfaces

2. Straddles with 50/70 percent ranges

3. 15/25/40 Delta Skew by Date

4. Term Structure

5. Net positioning (Aggregate and by day)

6. Technical Structure of the Market

7. Key zones to watch

8. Putting it all together

DX and GX Surfaces

DX Surface

Buy the dip looks like it’s here to stay as shallow dips down to 5900 should be bought by dealers and upside will be sold into. A deeper flush below 5875 or so could see dealers sell to hedge as well.

GX Surface

Gamma surface shows we’re in a generally stable environment with large OTM gamma spikes for Friday. This stability will likely show up in shallow dips and continuation of our trusty BTD regime.

The main takeaway from the surfaces is that dips look like they continue to get bought and we could see some near term upside volatility this week with CPI.

Straddles with 50/70 percent ranges

The straddle for this next week is 86 pts giving us a range of [5915,6085]. Wednesday is the largest single day increase (CPI).

The straddle pricing shows market is pricing in a steady increase to the straddle as the increases nearly every day are ~20 points.

The June OPEX straddle as of Friday’s May OPEX PM close is [5740,6175]. The reason I like to bring these straddles up is they provide a benchmark from period to period for price expectations as many market participants buy/sell straddles for OPEX to OPEX, Week to Week, and even Day to Day.

The 25 delta put and calls are priced similarly while the 15 delta puts are quite a bit higher than calls. This is standard market dynamics for what its worth.

Skew

Orientation of charts

• 15 delta = top (OTM) and is often the place for speculative upside/downside. It’s a bit wingy but not quite as wingy as a 5 delta.

• 25 delta = middle (slightly less OTM) and is often the relative delta for hedges

• 40 delta = slightly out of the money and is often the relative delta for directional moves

Orientation of data in charts

• Gray = ATM volatility (general demand in volatility)

• Yellow = Call volatility

• Blue = Blue volatility

• Red = Skew

Observations

ATM volatility climbs into Wednesday and remains elevated with a very slightly increase after Wednesday providing confirmation that the market has its eyes on CPI.

Term Structure

Term structure (as of Friday close) has again moved back to the relative lows for the past 15 days. Team Buy the dip is here to stay.

This shouldn’t be a surprise to anyone as the intraday market sentiment goes from “We’re so Back” to “We’re so done.” The Elon/Trump spat was written off this past week with single day volatility before the buy the dip crowd joined the party.

For me the main takeaway from the Term structure is buy the dip remains. Until volatility expectations increase and remain elevated, the dips will be bought. Lets see if any headlines in particular cause a sell off that sticks (I’m not predicting this).

Net positioning (Aggregate and by day)

Aggregate

This next week boasts an environment with more puts sitting in OI than calls. This is a simple OI view - The net exposure leans bullish each day this next week.

From left to right

• OI - Simple OI from Friday morning (just to show magnitude of positioning).

• Volm_BS - Today’s volume aggregated by buy/sell

  • Orientation

    • Blue = Put

    • Yellow = Call

    • Above X Axis = Net Bought

    • Below X Axis = Net Sold

  • We’re seeing alot of OTM/ATM puts being sold

• Volm - Today’s aggregate total volume

We’re going to start seeing our opex/vixex supportive flows at play this next week which should provide us a bit of upside (even if that is absorbed by negative headlines).

Upside

Above spot, I’d characterize the flows as generally supportive with a bit of bought/sold calls that switch exposure with notable dealer short gamma at 6100 for this week. Does this print? No clue. I’m a reactive trader so if we approach 6100, I’ll take shorter term beta off as that’s the weekly straddle high area with significant upside call volumes.

Downside

Downside flows are pretty much non existent for the next week in aggregate. The majority of the puts shown above are dealer long gamma - providing support to the market for our famous BTD trade.

Map

From the map module, we can see we are approaching an environment of positive delta and positive gamma which signifies dealers are long calls. Before you say, if dealers are long calls that means the market is short calls - that’s bearish! consider that sold calls are used to generate income and provide a bit of downside protection.

In case you’re wondering how I came to that conclusion around primary positioning, then the positioning article here:

Review of Positioning Metrics

has an explanation which I’ve copied and pasted below

Combinations

• Positive Delta, Positive Gamma - Then dealers net long calls

• Negative Delta, Negative Gamma - Then dealers are short calls

• Negative Delta, Positive Gamma - Then dealers are long puts

• Positive Delta, Negative Gamma - Then dealers are short puts

Technical Aspects of the Market

Before I cover key zones to watch, let’s look at some technical aspects of the market.

S&P Stocks above 200D average

Current reading is 49.2 which is generally in the middle of the range for the past ~2 years. If you look at how this metric pulls back, It looks like we’ve gotten a smaller pullback across the market while the market itself is nearing a test of local highs. Breadth can unlock higher if CPI or a note auction can provide a bit of s spark.

S&P Stocks above 50D average

Current readings is 72.61. The past weeks saw a move from high 70s to low 60s and it’s slowly working higher. The market reset a bit after May OPEX and is now looking to continue its drive higher into June Opex.

S&P Stocks above 20D average

Current reading is 61 down from mid 80s at May OPEX. This market technical is currently resting just above the 200D MA. Let’s see if breadth expansion can carry the market higher.

Total Put/Call Ratio

This metric is in the middle of the range with a reading of .87. Not really much to say here but this metric should start to fall into OPEX as downside bets are closed. We are getting another window of weakness after June OPEX into quarter end so lets observe how the market positions into month end.

CBOE VIX Volatility Index (1 month forward volatility of VIX)

The 30 day forward volatility of VIX is back to relative low levels. I think VIX calls represent a better hedge than puts at these levels as VIX is likely to stall here in the mid 16s and we can likely see some spot up/vol up dynamics as we approach highs.

Key zones to watch

In no particular order, we have a few big zones on the chart to watch.

First…. We’re in an environment of high volatility driven by headlines so these levels are going to be wide

From low to high:

1. 5560: April 1 Lows

2. 5570: Weekly Straddle Low

3. 5575: Mar 2025 & Tariff Day Swing low & 50D MA

4. 5610-5615: FOMC supportive downtrend.

5. 5635-5645: AUG/SEP 2024 Highs

6. 5660-5680: Tariff Breakdown Level

7. 5710: Pre-election Lows & MAR 2025 Swing high (several times) & 50W MA

8. 5750: Early March Lows and 21D EMA

9. 5775: Mid-January 2025 Low, Late Mar 2025 High, Election Gap Bottom

10. 5805: Weekly Straddle High

11. 5810 - Mid January Low Cluster

12. 5850: Post Election Lows, January 2025 Lows, MAR 2025 Breakdown

13. 5900-5905: Upper range of post election pull backs

14. 5940-5950: Late February Breakdown, early February gap support

15. 6000: Post Election NOV highs, Swing High Early Jan

16. 6050: Post FOMC early Jan Swing High, FOMC Breakdown

17. 6100: Lower level of ATHs

18. 6150: ATHs

Let’s Put these on the chart

Each of these identified levels is a guide to price action to watch into the next week.

They might each cause an extreme response as a squeeze might accelerate or a new sell off might begin.

Tie it all together

1. Straddles and 15/25 delta pricing are showing the market is looking at lower volatility this next week especially as 25 delta pricing is near par.

2. Realized Volatility has continued to fall. Selling volatility continues to remain a front and center strategy as realized volatility continues to fall.

   

3. Term Structure shows low expectations for volatility moving forward.

4. Options positioning shows a lean to stability or upside with very little downside bets materializing.

5. Technical environment shows the underlying market is generally back to neutral after seeing a pullback across market internals.

Summarizing the above, we remain in a BTD market with little focus on downside range expansion. We’re entering the supportive flow cycle this week which should provide additional stability. In the event, we get a headline dip, based on the information presented above, the market appear to generally remain in a BTD mentality

On to the position updates, and trades I’m watching.