The biggest options market in the world inverted yesterday.
I want to walk you through what that means, because almost nobody outside the professional side is catching it, and it is going to matter to you whether you trade options or not.
Start with the word skew.
Skew is how calls are priced against puts, and how far-out options are priced against near ones. Under normal conditions, the further out of the money a call gets, the cheaper its implied volatility becomes, because demand thins out the further you go from the current price.
Implied volatility is just what the market is charging for uncertainty. Higher vol, higher price.
Puts almost always carry higher implied vol than calls. People pay up for protection, and they have paid up for it my entire career.
Here is what is on my screen right now
Look at the August 7th expiration. The at-the-money calls are trading for an 18 vol, which is right around where the VIX is sitting.
Go $100 out of the money and those calls are trading for a 25 vol.
That is backwards. Way backwards.
And when you look at puts an equal distance out, their implied vol is lower than the calls. Which means that according to the options market, the odds of this thing crashing to the upside between now and Friday are higher than the odds of it crashing to the downside.
I have never seen a sustained inversion of implied volatility in the SPX. Not once. Weeklies and dailies are newer, so somebody can tell me I am wrong, but I do not believe anybody has seen this.
There will be white paper after white paper written about the inversion of skew in 2026.
Why it happened
The trade moved.
For months, when people got excited, they bought calls in Microsoft, in AMD, in Micron. The individual names carried it.
That stopped. Now they are buying calls directly in the SPX, and the dispersion trade has flipped over.
Think of a car dealership where everybody wants the same car at the same time. You walk in and say I will take it, I will take it, I will take it, and the price goes to ten grand over sticker, then twenty grand over sticker.
That is exactly what is happening in the biggest, fairest, most two-sided marketplace on the planet. The mother of all products, where at-the-money options trade ten cents wide on an $8,000 notional value, and the world has decided it wants calls at any price.
The part I want you to hear
This will end. I am not calling a crash and I want to be clear about that.
But somebody is going to be left holding the bag of risk here, and I am not sure how that plays out well for a retail trader.
When skew normalizes, the market-making side has to unwind. If price pulls back even a little, they have to dump S&P futures immediately, and you get chopped to pieces.
Expect up 100, down 200, up another 100. Inside a single session.
These are the biggest waves you will ever see in a marketplace, and you do not paddle out into something like this without complete and total commitment to the risk you are putting on.
To your success,
Don Kaufman
P.S. You can only win in a market like this if you have a plan. Here’s the one I have developed that’s kept me safe for decades.
