Stocks finished the day essentially flat, up 4 basis points. To no surprise to readers of this free daily commentary, the gapped lower and tested the put wall at 6,800. Implied volatility was crushed as put positions at that level were likely closed out, and stocks rebounded.
Basically, it played out just as described in the Sunday write-up.
The interesting part is that the still rose to 21.5 on the day, after peaking around 25 earlier in the session. Looking at the volatility smile, the March 20 implied volatility shifted higher overall. With little net price change, most of the move reflected an upward shift in implied volatility across the curve. Notably, put skew steepened while call skew flattened.
So volatility did rise on the day, but the sharp decline from the intraday highs helped fuel the gap-down rebound.
Meanwhile, the spread between the S&P 500 Dispersion Index and 3-month implied correlation narrowed. Historically, that spread tends to lead the S&P 500. It is difficult to construct a scenario in which implied volatility remains elevated, and correlations rise without the index eventually moving lower.
For now, however, options traders appear comfortable continuing to position around the 6,800 level.
It would also be challenging for stocks if rates and continue to climb. Higher rates and higher oil prices are not a healthy combination for any economy. The same applies to the — oil, rates, and the dollar have tended to move together since 2022.
If all three continue to rise, financial conditions will tighten over time, and tighter financial conditions are not supportive of equities.
But hey, as long as the options market is willing to hold up the S&P 500, what could possibly go wrong?
Original Post
