Hey trader,
Consumer staples had a day you notice without looking for it. XLP ran up over 4% earlier in the session.
The easy read is money hiding in defense ahead of tomorrow’s Fed announcement.
The size that printed today tells a different story. Puts were bought across the line in XLP, every one of them at or near the ask.
One of those prints was a straight buy of 10,000 contracts. I can see the individual fills myself once I filter for blocks of 100 or more.
I keep circling back to one thing. What does a buyer paying up for downside see in a sector that just ripped 4%?
Let me walk you through the read I built off it.
Buying Puts Builds Negative Gamma
The Console flagged four prints in XLP today. Volume to open interest was significant on all of them, at 2,400, 4,000, 4,000 and 10,000 contracts.
One of those was a spread. They bought the 86.50 and sold the 83.50 against it.
The 10,000 lot stands on its own as a straight purchase.
Buying puts creates negative gamma. Essentially, the dealer on the other side has to keep selling into weakness to stay hedged, which reinforces the move lower.
That is the condition I want as a trader. I want dealers selling the dips instead of cushioning them.
The stock was already starting to back off when I got to it. XLP was still holding about 2.5% on the day after being up more than 4%.
The Skew Is Doing Half My Work
Before I take a trade like this, I check whether the volatility structure pays me for it. The skew reads 16.7, 16.9, 17.2 and keeps climbing as you move across the strikes.
That is the supercharged option I walked through yesterday. I buy the low volatility strike, then sell the high volatility one.
The 86.50 strike carries about a 40 delta. A two-strike vertical there in August, 24 days out, prices at $0.55.
September gives me more room on time. The 86/84 out there runs about $0.57.
I like August with the higher strike price on this one.
Here Is The Trade I Priced Out
A two-strike put vertical means I buy the higher put and sell the lower one. That caps what I pay and caps what I can make, which is exactly the trade-off I want on a $0.55 position.
- Setup: buy the XLP August 86.50 put, sell the 84.50 put, 24 days to expiration
- Cost: $0.55
- Target: 85.50 in XLP, which is all it takes to close the gap
- Exit: roughly $0.95, taking 0.56 times 1.7 for a 70% gain
- Edge: skew at 16.7, 16.9 and 17.2 lets me buy cheap volatility against expensive volatility
- Alternative: September 86/84 near $0.57, targeting about 85
All of that requires about a $2 move lower in XLP over the next 20-some odd days.
I call that a high probability setup. It does not mean the trade will be profitable.
Two Pathways Open From Here
There are two roads that close this gap. The market rolls over, or capital rotates back into risk.
The rotation path was already visible on my screen this morning. Staples pulled back off the high while technology and MAGS snapped back.
Nvidia was up a little on the day. If earnings this week come in positive, money likely sells defense and buys XLK.
The Fed announcement lands tomorrow. That is the event that decides which pathway opens first.
This is a heavy news-driven week, so I am staying small on size. I still think there are appealing opportunities in XLP whether the market goes up or down.
I am not chasing the rally everyone can already see on the screen. I would rather sit with the structure the prints handed me and let 85.50 come to me.
If you want to learn to read the block before the move reaches the chart, that’s where I teach it.
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Brandon Chapman, CMT
Creator of Ghost Prints
