Lots of points to touch on in scan tonight but I’ll try to keep it somewhat concise. Let’s start with the index action.
I’m going to break down the move so that it makes sense. It wasn’t random, it was a combination of positioning, multiple factors coming together, and the time of the month.
The relentless run up in the tech sector recently, and call heavy positioning, is something that we have discussed a lot. TSLA perfect example. Parabolic runs into a big expiration (monthly options expiration on Friday) and then mean reversion trade happens. This was happening with most of the large tech names, not just Tesla. That is one factor that mattered today: call heavy market leaders that were vulnerable to mean reversions into large option expiration dates.
The next thing that mattered today was the VIX. Volatility instruments, in a very simplified way, measure how hedged the market is for large moves in the near future. Since things have been bullish and all dips have been getting bought, hedges were low all around. And even tho today was a Fed meeting day, the expectation was a rate cut and hawkish comments, so the market didn’t think it was necessary to be broadly hedged. Why? Because it’s been a low volatility market and the Fed meeting was priced to be a non event since everyone expected what would happen. And that meant the market had to rush to buy hedges when Powell starting changing the script.
Lots of people also short volatility products because they assume they will unwind after every spike. Well not today. That led to VIX basically getting squeezed as people piled into puts and hedges while people who were short volatility got blown out. Oh and one last thing. It was also vixexpiration today (like mopex but for VIX), which is when contracts roll to a new timeframe. So that process of people loading up vix for the next time period also contributed to the VIX spike.
The next part is what Powell actually said which was that he is not very pleased that they got some higher inflation readings and that he still wants 2%. That spiked bond yields which we can measure through TNX. Rising bond yields tend to hurt small caps like IWM. I’ve discussed this idea many times so I won’t get more into it right now.
And next, we have gamma. Just how stocks can have a gamma run higher when people relentlessly buy calls and market makers need to hedge by buying stock, the reverse can happen.
As people relentlessly buy puts in the market in order to hedge, that wild put buying requires market makers to short index futures as they try to balance out their books. So much of the put buying takes place on 0DTE timeframes it tends to have sharp runs like today when it gets out of hand. I don’t have a chart to show for this concept on here, but people were buying massive amounts of puts while at the same time the call positioning was unwinding. That creates smooth rides down.
So instead of a traditional watchlist tonight, I’m just going to leave this post here for people to review and think about.
You don’t need to be able to piece this all together after reading about it once. But these moves are not random, they are a culmination of many factors coming together. Just good info to be exposed to.
I’m also going to make this post available to everyone on X tonight so people can see what type of stuff we cover in Investors Underground.
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all giberrish to me but what a day!
Great Job Chris
Well said Chris. Thank you
thank you Chris, amazing commentary. love how you broke down things and put the puzzle pieces together for us to understand.
These are the days we live to trade for! Appreciate it Chris.
This provided a lot of clarity. Thank you, Chris!
Thank you Chris.
Thank you Chris!