Remember this chart?
This is the chart that I posted a week ago about what happened going into VIX expiration, which occured on July 17. While the market was making ATH highs on July 16, the COR90D had been rising since Friday July 12.
The theory is that this symbol is tied to the number of puts in the market. The expiration of the VIX on the 17th and all other options on Friday the 19th, had people buying protection.
The market had a sizable amount of call gamma expiring. These calls had been hedged by the market makers, by buying the underlying stocks or futures. Between Wednesday and the Friday of expiration, if a call was closed, the hedge is sold. All the hedges of the expiring options are sold when they expire on Friday. The market maker wants no directional risk.
A put is generally considered portfolio insurance, and not necessarily a speculative bet.
Market Bottom at 5331.75 and Reversal
The black line on the chart is from SpotGamma (which I pay for) and represents a level of significant put gamma. The ES price of 5330 represents the 5300 strike in the SPX. This was SpotGamma’s put wall. The put wall was tested 4 times in the span of 45 minutes.
The ZoneTraderPro Delta Strength indicator was picking up large lot trades of 100 or more, using its ability to rebuild the tape. These trades are likely closing puts at SPX 5300 and either rolling them lower for additional insurance, or taking profit, which is less likely. Market makers can buy back the hedges.
This removes the stress that the market makers have created by needing to hedge their options positions and allows price to trade 50 ES points higher in an hour and 20 minutes.
This is confirmed by the ZoneTraderPro COR90D indicator, which is displaying COR90D bar by bar.
Into the afternoon, we again see a drop back to the area of the put wall which is again confirmed by the ZoneTraderPro COR90D indicator.
This time however, there are fewer Delta Strength buy signals at the lows. My guess as to why this would happen is the the majority of traders that needed to trade when price was 5300 SPX, had already made their trades.
Another interesting theory to think about is why so many Delta Strength buy indications from 1200 to 1230 into the highs. Puts lose money rapidly as price trades higher, and it was possibly a rush to cover while there was still some value.
This explains why there are fewer Delta Strength markers as the markets the put wall at 1400 hours.
This is the SpotGamma Gamma Profile (courtesy of SpotGamma) which is available to all SpotGamma subscribers showing large put gamma at 5000, 5300, and 5400.
The ZoneTraderPro VIX Perfectly Aligns
The ZTP VIX chart gives us a perfect picture of the what was happening Friday morning. It is most important to emphasize two points.
The 1st point is having a trading plan and understanding options. Using the ZTP Delta Strength indicator and the knowledge that significant gamma sat at 5330 on the ES, you should have been prepared for a reversal there.
The second point is when ZTP VIX chart gives us a bullish reading, it may be time to stop hammering the short trades and start looking for longs or sit on your hands until there are valid short trades. That would happen again at 1245 hours, to re-test the 5300 put wall.
Because we definitely don’t want to be on the wrong side of the SPY chart below.
SPY Chart
