Hey trader,
I was set up for a bad jobs number this Friday. I thought there was a real chance the print came in negative.
Instead we got a three sigma beat.
Strong economic news, and the market spent the session selling into it. I can explain that part, and I will.
The piece I want your attention on is the VIX.
Stocks were lower yesterday, and volatility was lower right along with them, sitting down at 14.
Now set that next to the SKEW index, which closed at 150 yesterday after sitting at 126 a few weeks ago. Anything above 130 is high. At 150, institutions are hedging aggressively, and they have not pulled those hedges off.
So the desks are buying protection with both hands. The fear gauge is falling while they do it.
One of those is causing the other.
What are they doing that drives volatility down while their own risk gauge climbs?
Let me show you the mechanic underneath it.
They Run the Same Trade Every Day
Institutions own stock. To protect it they buy puts and they sell calls.
Buying puts creates excess demand on the downside strikes. Selling calls creates excess supply on the upside strikes.
The volatility curve takes on a smirk instead of a smile, with the puts priced richer than the calls. That tilt is negative skew, and it’s the normal condition for the S&P 500 and for most of the largest names inside it.
The index measures how pronounced the tilt has gotten. At 126 it’s ordinary. At 150 they have their dukes up.
Here’s the part that trips people. They’re selling far more calls than they’re buying puts.
Call selling dumps supply into the market, and supply drags implied volatility lower. That’s how the VIX falls while the hedging accelerates.
Skew still climbs because the puts stay bid relative to those calls. If the desks were the ones selling puts, skew would be falling instead.
They do sell puts. Most of that activity sits in zero DTE contracts, outside the 30-day window this index reads.
Three month over one month VIX tells the same story. That ratio is back above 1.2, and it has held there for most of the stretch since August 6.
Walk Up the Stairs, Fall Out the Window
All that call selling loads positive gamma into the strikes where the calls sit. Dealers sell into strength there and buy weakness.
Rallies into a heavy call strike get absorbed rather than extended. Essentially, the desks build the ceiling as they hedge.
That produces the pattern I keep coming back to. The market walks up the stairs and falls out the window.
Small up moves are the highest probability outcome on any given day. The real risk sits on the downside.
This is not a timing tool. Skew stays elevated for long stretches, and it has been persistently above 130 without a break.
There’s a second half worth knowing. When the selloff finally lands, the desks stop selling calls and start buying puts in size.
That buying is what spikes the VIX. It also drags skew back down.
Those puts then go in the money and turn into fuel. As they work back out of the money, dealers buy stock to unwind the hedges and the market rallies hard, which is exactly the sequence March produced.
The Same Structure Explains This Morning
Look at Friday’s SPY expiration and you can see the ceiling in contract counts. There are 17,000 calls at 775 against 2,000 puts, 16,000 contracts at 772, and another 11,000 at 773.
Underneath sits the anchor. 770 carries 25,000 contracts against 9,000 on the other side, which makes it max pain, the strike where the largest block of open interest expires worthless.
That’s the map. Now here’s why a three sigma beat still produced a red session.
We gapped slightly lower and opened on a neutral gamma level. The flip was waiting right underneath, between 771 and 770.
At 770 and below there’s significant negative gamma. Dealers stop absorbing moves and start reinforcing them.
We held for a while. Then 770 gave way and its gravity took hold.
Below 769 the lower strikes pull on price, and every leg down gets reinforced. None of that requires volume, which matters on a light session heading into a holiday weekend.
Yesterday ran the opposite script on the same map. 770 was the call wall and the high, and breaking it forced dealers to push price up toward 772.
Price stalled between 772 and 773 and rounded over. Identical levels. Opposite regime.
What I’m Doing About It
I’m not going bearish here. A 150 reading tells me to temper expectations rather than flip direction.
This week produced good trades. That makes it a week to take some profits instead of pressing them.
Then I mirror what the desks are doing. I hedge.
Here’s an example of how you could do things:
- Setup: For a $100,000 portfolio, buy two 757 puts and sell four 778/784 call verticals in the second October weekly. A vertical spread just means I sell one strike and buy a further one to cap the risk.
- Cost: About $126 net. The puts run roughly $5.23 each, and the four call verticals bring in about $2.30 each.
- Edge: Elevated skew pays for it. The call side is richer than it was a couple of days ago, which is precisely why this structure costs less than it did then.
- Adjustment: Below 757, sell that put and buy a lower strike. That collects around $1,000, which funds buying the call spreads back.
- Smaller size: $50,000 is the floor. That’s one put against two short call verticals.
The tradeoff sits at 778. Your upside is capped above that line until you buy the call spreads back.
Run one check before you size it. If the average implied volatility across your holdings is 35% or less, you’re close enough to the S&P 500 for this hedge to track properly.
You still own your stock. You still participate in the upside.
You just stop carrying full exposure while the desks are paying up for protection.
Brandon Chapman, CMT
Creator of Ghost Prints
