Post-OPEX Dynamics Drive Thanksgiving Week Rally
The shortened Thanksgiving holiday week delivered exactly what we outlined in our Monday morning Founder’s Note: a powerful post-OPEX rally driven by put option decay and volatility compression.
The week marked a significant bullish pivot for U.S. equities, with the S&P 500 rallying from 6,636 to 6,849—a gain of over 3% in just three and half trading sessions.
This rally came together from a culmination of several important factors. Friday’s put-heavy options expiration cleared bearish delta positioning, allowing the market to mean-revert upward through post-OPEX tailwinds. Holiday time decay forced put holders to face an accelerated loss of value — a significant “tax” in this high implied volatility environment. The market rallied, and SPX vol began sliding back down.
The negative gamma conditions for SPX amplified upside price action once buying momentum began. Additionally, optimism around a December Fed rate cut provided further support for risk-on sentiment, with the probability of a rate cut rising to 85% in the past week.
Unusual Dynamics: The Put Paradox of Rate-Sensitive Names
Amidst last week’s market rally, things get much more interesting when looking at positioning for individual names and sectors. Despite the current 85% probability of a December rate cut, traders have aggressively bid up puts in rate-sensitive areas. ETFs such as IWM, TLT, HYG, and KRE all show over 90th percentile put skew, indicating extreme hedging and/or highly bearish positioning.
For IWM in particular, the ETF has rebounded more than 4% from the lows of last week, and has returned approximately 10% year-to-date. We discussed the specifics of IWM positioning in our article earlier this week: increasing put skew, high rate-cut odds, and a bullish market create what seems to be a favorable setup for selling put spreads and bullish risk reversals.
However, last week’s order flow showed that many traders did the opposite, which has caught our attention: one recent trade showed a bought-to-open 20k lot 231/228 put calendar spread expiring December for $1 million in premium.
Taking a look at the term structure, IWM shows meaningful dispersion between current IV sitting under 20% and Forward IV approaching 40% for December 10.
Loading the aformentioned bear put calendar spread into our Options Calculator, we can project the PnL of this trade for December 10.
Should IWM hit the upper 231 leg of the put spread and vol close just half the distance between current and Forward IV, the position’s value would increase from ~$35 to $110—a 3x return. This trade therefore brings a strong risk-reward ratio if volatility was truly underpriced and especially if a rate cut does not materialize in December.
December FOMC Becomes the Defining Market Event
The next two weeks contain a number of major data prints and events that traders should pay attention to:
- Dec 1: ISM Manufacturing
- Dec 3: ADP Employment, ISM Services
- Dec 4: Initial Jobless Claims
- Dec 5: PCE Data, UMich Consumer Sentiment
- Dec 10: FOMC
The volatility tailwind that supported this week’s rally may be exhausted, meaning next week’s data releases are likely to be even more impactful. Event volatility cannot fully release until after these data points are out, and the term structure remains elevated heading into FOMC.
As always, we encourage our readers to stay informed of volatility, know where dealers will have to hedge (and how they will have to hedge), and watch how positioning changes day-to-day.
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