Hey trader,
I priced two vertical spreads in XLP, the consumer staples ETF, on the same two strikes. The one that pays off if XLP falls cost 88 cents.
Its bullish twin cost $1.15.
Both are in-out vertical spreads. That basically means buying one option and selling another, with the price sitting between the two strikes.
If you hold one to expiration, it’s about a 50/50 bet. Without an edge, you’re paying for a guess.
I lean on two edges to tip those odds my way.
Skew, essentially the volatility gap between the option you buy and the one you sell, can get you in cheaper. A set rule for closing early raises your odds of leaving with a profit.
You’ll learn to check whether a vertical spread is priced in your favor before you buy it. You’ll also get the exit rule I use to turn that even bet into a high-probability trade.
That 27-cent gap in XLP shows the first edge at work. I’ll start there.
Why XLP’s Bearish Vertical Spread Came In Cheaper
Two things set the price of a vertical spread: the odds it pays off and skew.
On an in-out vertical spread, the odds are already pinned near 50/50. That leaves skew as the only factor.
For a vertical spread, I read skew as the volatility difference between the option I buy and the one I sell. The average volatility across the chain doesn’t mean a thing here.
On any two-leg spread, I want to buy the lower volatility and sell the higher.
XLP’s bearish vertical spread does exactly that. Buying the 84 put and selling the 82 put lands me on the right side of the gap.
The bullish version flips it. Buying the 82 call and selling the 84 call means paying up for the richer volatility.
Why Staples Carry That Skew
I pulled up XLP’s volatility curve for December and January. Implied volatility, essentially the movement the market prices into an option, climbs from 14% at 83 to 17% at 77.
That’s a 3-point jump on a base of 14, or about 21%. Puts way out of the money trade at a hefty premium.
The market knows how staples tend to move. They climb slowly and then fall hard.
XLP took months to climb from about 80 to 88. It gave half of that back in a week and the rest in about a month.
Institutions hedge for that drop by selling calls to buy puts. Their hedging shows up right in the curve.
How Closing a Vertical Spread Early Raises the Odds
Skew handles my entry. My exit rule lifts the odds above 50/50.
I close at 30% if I can get it within three days of getting in. After that third day, my target moves to 55%.
On a trade opened Friday, that means shooting for 30% by Wednesday.
Taking profits early raises the probability of walking away a winner. It may push a 50/50 trade up to something like 70%.
I start with skew in my favor and ideally pay less than a buck on a $2-wide vertical spread. Then I close early, which builds a high-probability strategy.
Why Gamma Matters Less Here
A question came up in my session about whether gamma exposure, or GEX, improves the odds. GEX basically maps where dealer hedging tends to slow price down or speed it up.
Positive gamma contains price. Negative gamma stretches for bigger moves.
For an in-out vertical spread, the regime barely matters. The trade only needs a small move, and 30% in three days is within reach in either regime.
Walls still count, since they show you the barriers to price. A bearish vertical spread sitting up against a call wall gets some help from it.
How I’d Frame XLP Right Now
XLP looks stretched. It’s trading about 2.5x its expected move for the week, which is the range the options market priced in.
I think it’s time to consider the bearish side. A small pullback could be enough to reach that 30%.
This is a framework rather than a call. Here’s how the vertical spread lines up:
- Setup: Buy the XLP 84 put and sell the 82 put, about 42 days out.
- Cost: 88 cents, under a buck on a $2-wide spread.
- Target: 30% within three days of entry, then 55% after that.
- Edge: The spread buys the lower volatility and sells the higher. XLP also sits about 2.5x its weekly expected move.
I’m also closing the XLP call vertical I shared earlier this week. It was marking about a 73% gain, and I’d rather not carry it over the weekend.
Before you buy your next vertical spread, compare the volatility on the strike you’re buying with the one you’re selling. Then pick your profit targets on day one.
Pricing vertical spreads like this is part of every session I run with members. The 90-Day Block Hunter Challenge is where I hand you the same tools I used today.
Here’s what you get when you join:
- The Block Hunter Console, scanning hundreds of names for hidden pressure.
- 2 to 3 block alerts a week, plus one high-upside setup every Friday.
- The live Masterclass and 12 weeks of mastermind sessions with me.
- Ghost Hour from 11:30 to 12:30 EST every weekday. That’s the window when the market moves fastest and the prints tend to show themselves.
Recent Block Hunter reads include SILJ +392%, PLUG +222%, NKE +142% and GDX +72.5%.
The next vertical spread priced in your favor might already be sitting on the Console. Your next 90 days start today, and your seat is protected by a full 30-day money-back window.
▶ Join the 90-Day Block Hunter Challenge
Brandon Chapman, CMT
Creator of Ghost Prints
