May 7th, 2026 Option Outlook

Peace?

Good Morning! Optimism for peace popped SPX another 1.45%.

It is a little weird that 105 point move is only 1.45%, but these are the levels SPX is at right now! All time highs after a historic run to the upside, fueled by AI. Some people asked me what I think the catalyst would be for a downturn, and are typically shocked when I say, “Probably a peace agreement and the reopening of the Strait of Hormuz”. Isn’t that bullish? In late March, markets were at 6350 and there were a lot of shorts according to Goldman institutional position tracking. Upon a modest peace potential, we started this massive run to the upside, likely squeezing all of those shorts. I would be scared to re-enter until these small incremental peace headlines are over if I were them. Yesterday the headlines said America sent a “one-page memo” for peace. What was the font? How big was the font? Was it written in Farsi? Yet, markets rallied on that. It is such a vague statement, but macro shorts are afraid to re-enter until these headlines are no longer a threat. There are some key things to see in the option market, what do we see?

The term structure widget tells a scary story with massive negative aggregate vanna. June opex and full book aggregate vanna won’t be neutral until we reach ~6900. What this is saying is that institutions aren’t taking this rally seriously. No one is rolling their calls, and there are many calls that are ITM in the June and December tenors causing this term structure. There is only slightly bullish vanna for the end of May, likely from monthly rollovers. Even this week has turned to slightly negative vanna. That being said, vanna hasn’t been driving markets for a lot of this rally, blowing out some big strikes like 7000 for June, but eventually the bills come due.