Hey trader,
Utilities jumped about 2.5% today with very little help from the news. Most of that move traces back to what happens when a call wall breaks.
XLU, the utilities ETF, had been stuck under two call walls at $40 and $40.50. A call wall is basically a strike with a huge pile of call contracts sitting on it.
The dealers on the other side of those contracts hedge by selling into strength. Every push toward the wall runs into a seller.
Once you know how to read a call wall like that, you can tell whether a rally is about to stall or about to run. You can also spot the walls that look big on the chain and barely matter.
Today XLU broke through both of its walls. After it cleared them, that selling got out of the way, and price had room to run.
Somebody also built a new wall in XLU today. I don’t think it’ll hold the stock back much.
I started watching those first two walls on Friday, so that’s where I’ll pick it up.
Why a Call Wall Stalls Price
I build walls from open interest. Open interest is simply the number of contracts still on the books at each strike.
When a big pile of calls sits at one strike, dealers usually end up in positive gamma there. Essentially, they sell into strength and buy into weakness to stay hedged.
That hedging works like a ceiling. Each time price pushes toward the strike, a dealer is there selling.
On Friday, the walls at $40 and $40.50 belonged to this week’s expiration. They were the headwinds standing between XLU and a bigger move.
My read came down to one level. If XLU broke $40.50, it would free up a move toward $43.
I’d been waiting for that line in the sand at $40 to give way. Lines like that tend to get cleared fast, and XLU cleared it today.
What Happens When a Call Wall Breaks
XLU pushed through both walls in one move and got close to $41.
Above that, open interest thins out until $42. With far fewer contracts overhead, there’s much less dealer selling to slow price down.
Past $42, the next levels come from trades I flagged in Friday’s Masterclass. Someone bought a 43/46 call vertical, and another trade bought calls outright at the 45 strike.
A call vertical basically means buying one call and selling a higher one against it. Those calls expire in December and January, far enough out that I don’t read them as hedges.
I call the 43 and 45 strikes accelerators, since dealer hedging there tends to speed price up. They point to $43 by December and $45 by January.
How to Tell Whether a New Call Wall Matters
Somebody sold a big block of December 41 calls today. That builds a new call wall at $41, right where XLU is trading.
When an institution sells calls, the dealer buys them and ends up with positive delta. Delta measures how much an option moves with the stock.
The dealer offsets it by shorting XLU, and that hedge is already in place. As XLU climbs, the dealer sells a little more to stay hedged.
I’d call the 41 strike a suppressor, the opposite of an accelerator. Dealer hedging there slows price down.
Before I let a call wall like that worry me, I check how much gamma sits behind it. A call wall that expires months out carries a lot less gamma than one expiring this week.
Gamma on those December calls runs about six cents. Their delta won’t change much on a $1 move to $42, so the dealer has very little extra selling to do.
Someone also bought December 45 calls today, which adds to the accelerator at $45.
How I’d Trade XLU From Here
The cleanest way I see to play that open path is a short-dated call vertical that tops out at $42.
In the October 16 expiration, about 10 days out, the 41/43 vertical ran about 44 cents. There isn’t much premium to sell at $43, though, so you could simply buy the 41 call.
I’d rather narrow it to 41/42. Here’s how I’d set it up:
- Setup: Buy the October 16 41 call and sell the 42 call.
- Cost: About $0.33.
- Target: About $0.75, which needs XLU to approach $42. That’s over 100% potential gain.
- Adjustment: If XLU drifts back, I could move the spread down to 40.50/41.50. Then $41.50 becomes the target.
- Edge: XLU cleared each call wall at $40 and $40.50, and open interest thins out until $42. The accelerators at $43 and $45 add upside pressure.
Next time a stock sits under a call wall, look at how much open interest sits above it. If the strikes thin out past the wall, a break has room to run.
When a new call wall shows up, check its gamma before you let it scare you off. A big print with little gamma behind it won’t stop much.
The news didn’t point me to XLU. Friday’s prints on the Console did, along with the walls standing in their way.
I do that work with members every session. 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 call wall to break 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
