A squeeze dies before your chart tells you it did.
Most traders watch a market rip and figure the move feeds itself. It does not. A squeeze runs on one specific mechanical obligation, and the second that obligation gets satisfied the fuel is gone, no matter how good the candles look.
This morning is showing it. Holy crap, somehow it is August, and we opened the month by blowing straight through the top of the range.
We closed Monday literally, I mean to the freaking penny, on the upper edge of the expected move. I drew that line over the weekend at 7,600 and we closed 7601.15.
Then we opened 30 points outside it and are now trading well above 7700 on the S&P 500.
Two straight weeks without tagging an edge, and now we are not only hitting it, we are through it. That is where the gamma squeeze kicks in, and not to the downside. To the upside.
You want some gamma? Gamma’s hungry.
You can look at gamma till you are blue in the face. Who gives a crap? Let me show you delta instead.
When you buy calls, the market maker on the other side is short them, and to stay flat he has to buy S&P futures as price climbs. That forced buying is your squeeze.
Delta tells you how much an option moves per dollar the index moves. Once it goes deep in the money that delta hits 1 and the thing moves dollar for dollar.
The moment it hits a one delta, the gamma is gone. He offsets, he is long one against short one, and it locks up. He is done buying.
That is why zero DTE completely changed the entire nature of this beast.
With daily expirations the options that drove your move go in the money and get neutralized inside the same session.
This is deep. This is market-making, and half of you are reading this going that sounded good, but I don’t know what the hell he’s talking about. That is fine. Read it twice.
Fresh calls. Fresh calls. Fresh calls.
That is the only thing that keeps a squeeze alive. At the money, slightly out of the money, bought new.
The in-the-money stuff does not perpetuate any more squeeze. It already did its job and got hedged out.
We still had that fuel this morning. SPX did 715,000 contracts 25 minutes into the day. That is sick volume. Sick. Off the hook big.
The at-the-monies traded 28,000 against 1,500 on the put side, and this is a product 10 times the size of the SPY, so that is like trading 280,000. Run the notional on it and you get an “oh crap” moment, because you are into the trillions and most calculators can’t even hold the number.
That is why I call the SPX the mother of all products.
The part that makes people mad
The market-making algorithm doesn’t give two craps about your algorithm over there. It doesn’t care about your Fibonacci.
It cares about hedging risk, and when the risk is already hedged it stops acting. Your chart has no idea that just happened.
Is it an all-time high? Yes. Thank you, Captain Obvious. I could give two craps about the all-time high, because what the professional world actually cares about is gamma risk, and we are outside the expected move by 40 points.
Somewhere between $40 and $60 outside, the oomph mellows out. I have seen this exact movie before, and I take everything with a grain of salt until we make a more substantiated break.
To your success,
Don Kaufman
P.S. It’s been a traders market all year, and the back-half isn’t going to be any different. Without a plan, you’re just making emotional decisions and getting sliced up. How do you stop the damage? By having a plan. Here’s my plan, a free gift to you.
