Hey trader,
Friday morning looked like a day to buy. Nvidia was leading, with the rest of the Mag 7 right behind it.
I wasn’t sold. I went down the list and pulled up the leaders one at a time.
Every one of them was sitting in positive gamma.
Positive gamma basically means dealers sell into strength and buy into weakness to keep themselves hedged. Each push higher runs into a seller.
Once you can spot that, you’ll know whether a rally has room before you put money into it.
The S&P 500 gets a lot of its weight from a few stocks like Nvidia. If they can’t push through, I have a hard time seeing the index go much higher.
Meta touched 740 for about a split second today and backed right off.
I call levels like that walls, since they’re strikes with a huge pile of option contracts on them. Reading them Friday morning put me short Nvidia for 22 cents.
Apple showed me what one of these walls can do earlier this past week.
How Positive Gamma Stopped Apple Cold
Apple has a massive wall at 335 and a much larger one at 340. Earlier this past week, it ran straight into 340 and collapsed.
I read those walls off Apple’s GEX graph. GEX, short for gamma exposure, basically maps where dealer hedging can speed price up or slow it down.
In positive gamma, dealers sell as price climbs to stay hedged. A stock tends to decelerate as it runs into a wall that big.
I flagged Apple in chat Friday morning while it was testing 335. I started working an order, then backed off before it filled.
That would’ve been a great short.
I had a 332.50/330 put vertical in mind. That means buying the 332.50 put and selling the 330 put against it, which caps both what I pay and what I can make.
The spread was going for about 35 cents up at the wall. When I checked it later, it was trading at 89 cents.
A positive gamma wall doesn’t promise a collapse every time. Meta could still rally from where it sits, even after backing off 740.
Where Positive Gamma Trapped SPY
SPY spent the morning locked between 770 and 772. Each of those walls carried about a billion dollars in gamma, with a bigger one waiting at 775.
My plan was to fade a test of 775 if SPY broke 772. A fade basically means betting the move reverses.
SPY never got there. It stayed trapped between the walls at 770 and 772.
The leaders explain why. With the Mag 7 all sitting in positive gamma, SPY had nothing strong enough to push it through.
I didn’t like what I saw underneath, either. The dollar strengthened after a weaker-than-expected jobs number, when I’d expected it to get crushed.
Breadth was failing too. That’s basically how many stocks are joining the move.
DIA tracks the price-weighted Dow, which makes it more balanced than the S&P 500. It looked likely to put in a lower high after the open.
With the leaders boxed in and breadth slipping, I leaned bearish for the day.
How I Traded Nvidia Off Its Wall
Nvidia was up at 237.50 Friday morning. Its big wall sat at 235, with massive gamma stretching all the way up to 240.
I figured Nvidia might stay bottled up there. I also thought it had a good shot at retesting 235.
I went with the same kind of put vertical I’d lined up on Apple. Here’s how it looked:
- Setup: Buy the Nvidia 235 put and sell the 232.50 put against it.
- Cost: $0.22.
- Target: $1, on a retest of Friday morning’s lows.
- Exit: I closed it at $0.65 so I could get ready for my session.
- Edge: It was a cheap shot at a retest of 235 while Nvidia sat bottled up above its wall.
I got out a little early. The spread would’ve hit a dollar at the lows later on.
What I Check Before I Chase a Rally
When the index looks like it’s running, I go down the list of leaders one at a time. I start with the biggest wall sitting above each one.
Then I look underneath for the flip to negative gamma. Below a flip, dealer hedging speeds moves up instead of slowing them down.
On Amazon, that flip sat at 250. Amazon starts to get slippery below it.
Once I find a leader stuck at a wall, I wait for price to confirm the resistance. On SPY today, that meant a five-minute candle closing below the low of the high bar.
That sequence pointed me short Nvidia at 22 cents while SPY sat trapped under 772.
Brandon Chapman, CMT
Creator of Ghost Prints
