The S&P 500 is stuck in a risk sandwich

[0:00]The S&P 500 is sitting inside a $22.7 billion risk sandwich, and it's about to hit the bread. Every quarter, JPMorgan hedges $18 billion in S&P exposure through their hedged equity fund. This is ticker symbol JHEQX, and the hedge is a put spread in SPX index options, and it's gigantic. 35,000 contracts per leg. This is the single largest recurring option structure in the entire index complex. So here's the sandwich. The top of the bread is 6865. That is the short call. When SPX approaches this level, dealers have to sell ES futures to rebalance their Delta. The closer we get, the more dealers sell. The bottom of the bread is 6180. This is the long put. The dealers that sold JPMorgan this hedge, they have to buy these dips. And 6180 becomes mechanical support. Below 6180, the math starts to invert. When the put moves into the money, delta accelerates and dealers now have to sell ES futures to hedge. Below the sandwich is 5210. This is where JPMorgan's protection ends. But right now we are in this 685 point range where all of the options are out of the money. In other words, there's no active dealer hedging right now. This is how after the Iran ceasefire announcement, we were able to rip uninterrupted in a straight line. But here's the problem. The run has been so good that we are now 37 points from the top of the bread. So if you're brave enough to get long at current levels, your runway will mechanically be stopped short. You have to fight through an enormous amount of resistance just to make headway. And while the market is trading like this war is over, I can assure you there's nothing like 35,000 short calls to hedge to dampen that exuberance. If you want to understand positioning, just like the sandwich, I keep you up to date every single week in the Crown Macro letter.