Hey trader,
Just when everyone thought the bottom was going to drop out…whoosh…new all-time-highs.
Pretty remarkable given the sentiment and geopolitical backdrop.
But is this just some fake rally trying to suck in the last average Joe? Or, do we have a real run on our hands?
The answer is sitting at one strike price.
There is a $4 billion gamma gap between the calls and the puts at SPY 775. We tested that level this morning and broke lower very significantly.
That gap tells you what dealers are forced to do. They sold those calls, so every push higher makes them sell stock into the strength.
Breaking it changes the math completely. The next walls sit at 780 and 788, and 788 is a 16 point advance off today’s open.
I’m going to walk you through what has to happen at 775 for this run to be real.
The Wall That Stopped Us Cold
At 775, there is more open interest on the call side than at any other strike. That is what earns it the name call wall.
The net gamma gap between the calls and the puts sitting there runs $4 billion. That is billion with a B.
Positive gamma exists on SPY because they sell calls and buy puts. Dealers end up short those calls, and every dollar higher forces them to sell stock to stay hedged.
That is guaranteed selling.
I know how they respond at that level before price ever gets there. Other flow can overwhelm it, though the response itself is not in question.
We pushed into 775 this morning and topped out around 774.50. The dealers defended, and price broke lower very significantly.
Below us, 770 is the put wall. We are boxed in between those two numbers.
Today’s zero DTE expiration tightens the box further. At 773 there are 10,000 and 4,000 contracts. At 775 there are 10,000 and 1,600.
More interest sits at 773 than at 775 for today. Max pain lands there too.
Inside positive gamma, dealers buy the dips and sell the rips. That combination pins price rather than trending it.
What Turns This Into a Real Run
Poking through 775 does not count. I want to see price pull away from the level and form a higher low above it.
That move has to be backed by call buying.
The put-to-call ratio tells me whether it started. Right now it reads 0.915, which is balanced with slightly more calls traded than puts.
Last Wednesday and Thursday it ran near 1.2. Today looks like premium selling on both sides.
When that ratio flips and they are all buying calls, the whole structure changes. Dealers get forced to buy into strength on a zero DTE basis. I call it volatility up, and some people call it vol up, spot up.
We saw exactly that last week once we broke 760.
The open interest above maps where it goes. 775 holds 90,000 contracts, 780 holds 140,000, and 788 holds 139,000.
Break 775 and price drives quickly to 780. Break 780 and call buying may carry it to 788.
Off today’s open at 772, reaching 788 is about a 16 point advance. That comes to over 2% by the end of the week.
The Trade I Have On Right Now
I am long the 774/772 put vertical. I bought the 774 put and sold the 772 put, which caps my gain and cuts my cost versus owning the put by itself.
The pricing made it worth doing. Put skew is heavy today, with roughly a 3% implied volatility difference between those strikes.
That makes these downside spreads pretty dang cheap.
- Setup: long the SPY 774/772 put vertical, zero DTE
- Trigger: fading the 775 call wall after the test
- Target: 90 cents to a dollar, which prices out around 773
- Edge: 773 carries the most zero DTE open interest and sits at max pain
- Cost: 45 cents
I normally look for 60% to 100% on these. Holding for the absolute top of that range is where I get myself in trouble.
There is a premium version of the same idea. Selling the 774/776 brought in about 67 cents this morning against $1.30 of risk, with the plan to buy it back near 20 cents.
What This Week Actually Looks Like
The weekly range runs 758 to 780. That is 22 points, which is pretty typical.
Underneath the market there is almost no put open interest. At 758 there are 27,000 puts balanced against 13,000 calls, and at 760 it reads 10,000 calls to 20,000 puts.
Real imbalance does not appear until somewhere around 740.
Gamma stays very light the whole way down. No accelerators exist to drive a fast break, though price can still grind lower under its own weight.
We may drift toward 758 through attrition.
A genuine bear case needs put buying to build open interest down there first. I will be watching for that imbalance to show up before I trust any downside.
For today I am watching 770. There are 5,000 calls and 8,000 puts at that strike, so it may flip negative later in the session.
Late in the day we may pin 775 or settle back at 773. Until the downside structure gets built, I am not expecting much volatility out of this week.
Brandon Chapman, CMT
Creator of Ghost Prints
