Don Kaufman here.
Most traders got caught up in the headlines Friday.
Trump threatened China with tariffs. Tech stocks crashed. The Dow dropped 560 points.
But here’s what actually mattered – and why I was positioned perfectly while others got blindsided.
The Real Story Was Hidden in the Derivatives Market…
When that first wave of selling hit, the S&P dropped 40 points. Volatility futures barely moved – one point higher on a 40-point drop.
The second wave changed everything.
Volatility futures went parabolic. From 18.5 to 20+ in minutes. That’s when I knew we had a real problem.
Most traders think volatility reacts to selling. That’s backwards.
Volatility futures going parabolic FORCES more selling.
When vol futures spike like that, every derivatives firm gets caught in “dynamic hedging” – they’re mechanically forced to sell into any rally attempt. It’s predictable, and it’s exactly what crushed those “buy the dip” attempts all afternoon.
We Just Broke the Critical Level
While everyone watched headlines, I had my eyes on our expected move calculation: 6620 on the SPX.
We tested it. Bounced. Then broke right through it.
That breakdown triggered exactly what I feared – the “vol-mageddon” scenario where forced selling accelerates. I used the initial test to nail two butterfly exits for 345% and 400% gains before the real damage hit.
What This Means for Next Week
Bond markets are closed Monday, eliminating a key hedging mechanism. With 6620 now broken, we’re in uncharted territory for volatility expansion.
The Torture Pattern
Markets don’t crash in a day anymore. They torture you.
Monday we rally. Tuesday we get smoked. Wednesday we rally again.
Each bounce draws more capital back in – capital that gets destroyed on the next leg down.
My Bottom Line
While everyone argued about tariffs, the derivatives market screamed the real story.
Volatility futures don’t lie. That’s how I turned market chaos into some of my best trading days of the year.
The break below 6620 changes everything. We’re now in the danger zone I’ve been warning about.
To your success,
Don Kaufman
