Hey trader,
I start with the October 2 expiration, since that’s Friday. Then I look for the strikes with the most contracts sitting on them.
On the upside, 14,000 contracts sit at 772. That’s my ceiling for the week.
The 775 strike gets bigger as I go further out in time. I could push the ceiling up to 775 and give the range 10 points of upside.
I’m sticking with 772 for now. Given where SPY stands at 765, it’s the level I trust.
It also carries more open interest for Friday than 775 does.
Underneath, the biggest level for the week sits at 750. That’s another 15 points below 765, or basically 2%.
There’s a stop along the way at 761. That wall carries about $1.3 billion in gamma right now.
Gamma, in this case, is essentially a measure of how much stock dealers may need to buy or sell as price moves through a strike.
The 761 wall could grow past $2 billion if SPY runs toward it. A wall that size might stall price.
If SPY breaks it, I’d look for a run down to 755.
Friday’s option chain is the first place I look.
Why the Volatility Market Leans Lower
A range gives me two boundaries.
The volatility market helps me decide which one price is more likely to test.
I checked three readings:
- The VIX: It’s been scraping bottom, sitting around 15 on Friday. The VIX basically measures how much movement options traders expect from the S&P 500 over the next 30 days.
- Term structure: It closed Friday back above 1.2. Term structure compares how volatility is priced across different time frames. I like to look at the current month against three months from now.
- Skew: It sat at 144 to 145 as of Friday. Skew tracks how much more traders are paying for downside protection than for upside bets.
Put together, those readings tell me the volatility market sees significant downside risk.
SPY’s positioning points the same way. It’s squarely in negative gamma, with the flip to positive gamma not coming until 770.
In negative gamma, dealer hedging tends to push price in the direction it’s already moving. Essentially, moves speed up instead of slowing down.
That stretch below 770 works as a cushion of negative gamma. It may create more downside pressure.
Positive gamma kicks back in at 772. It’s only $300 million there right now.
That number should grow as SPY moves up. The 775 strike will grow too.
What Tomorrow’s Expiration Adds
Friday’s walls set the range. Tomorrow’s expiration shows me how the next session could open.
About 21,000 contracts sit at 765 for tomorrow, with another 12,000 at 764. SPY may be building a wall right at 765.
If SPY finishes below it, I’d expect a gap lower. From there, the move can start to accelerate.
Tomorrow’s flip doesn’t show up until 768, where calls start to outnumber puts. That gives SPY a very good chance of opening tomorrow in negative gamma, especially if it finishes lower today.
As long as SPY keeps finishing below those walls, it’ll face downside pressure all week. That changes if it breaks through the upside walls.
The walls can still shift. Not much trade shows up for Friday until 770.
That strike may outstrip 772 by the end of the week.
How I’m Using the Range
This is a framework for the week rather than a single trade. I draw the lines first, then let price show me which one it respects.
Here’s how I have it laid out:
- Ceiling: 772, with 775 as the adjustment if I move it higher.
- First support: 761, the next major wall below 765.
- Floor: 750, the biggest level for the week.
- Bias: A run toward 767 or 768 is where I’d look to go bearish. If SPY breaks through 765 first, I’m looking at 764 and 762.
The range came from Friday’s biggest strikes. The volatility market and the negative gamma cushion told me which side to favor.
Things can shift as new contracts pile in this week. For now, my lines sit at 772 and 750.
I’m watching where SPY finishes against 765 next.
Brandon Chapman, CMT
Creator of Ghost Prints
