The Math is Ugly Right Now

New Market Video Update

Author

Don Kaufman
July 28, 2025

Hey Folks, Brandon here. 

The math is ugly right now. Any positive news this week probably won't be received as positively as negative news gets punished.

That's not market opinion - that's what institutions are pricing. The skew index just dropped from nosebleed levels of 160 to 145 on Friday. 

Still high. 

The three-month VIX is 22% higher than spot VIX - highest level since December 24th and February 14th.

Translation: Big money expects volatility. Soon.

The Asymmetric Risk Problem

Look at Google's earnings. Good numbers, not rewarded. Tesla missed, big gap down. We've got Microsoft, Meta, Amazon, and Apple all reporting this week - four of the MAG 7 representing massive S&P 500 weight.

Add the FOMC statement Wednesday and potential China tariff news August 1st, and you've got a perfect storm where beating expectations might get you flat while missing gets you crushed.

When risk is this asymmetric, you need to position accordingly.

The Volatile Stock Reality Check

Take SIDU - down 40% today. Not even earnings. Just Monday.

Rocket Lab could drop 30% tomorrow on any headline. These stocks trade with 92% implied volatility while the S&P sits at 15%. Their beta says "two times more volatile" but reality is five to six times.

You can't hedge these individually. Portfolio-level hedging won't help when the S&P drops 5% and your speculative names drop 50%.

What I'm Doing About It

First step: Take 30% profits. Not losses - profits. Raise cash in the volatile names that have run on short squeezes.

Second: Hedge the correlated positions with a specific strategy.

Here's the exact mechanics on a $100,000 S&P-correlated portfolio:

The Trade:

  • Portfolio: 157 SPY shares (157 delta exposure)

  • Reduce by 30%: Target ~50 delta reduction

  • Buy: 2 SPY puts, 30-delta, 39 days out (currently 621 strike)

  • Sell: 4 SPY calls, 40-delta (currently 644 strike)

  • Net cost: Approximately break-even (put cost offset by call premium)

The Result:

  • 10% market decline: Down only $269 instead of $10,000

  • 10% market rally: Capture $7,600 instead of $10,000

  • Portfolio delta reduced from 154 to 63

You give up some upside to eliminate most downside.

The Management Strategy

If SPY drops below your long put strike (621), roll it down. Sell the 621 put, buy a new 30-delta put. You've just booked roughly $1,000 profit while maintaining your hedge.

Close the call spread for about 10% of premium - maybe $100 total. Now you've got a profitable put hedge in place and cash to deploy.

One client just captured $50,000 using this approach during the recent selloff. That's real money that can be redeployed when opportunities emerge.

The Bigger Picture

We're sitting with VIX at low levels, skew high, and forward volatility expectations at extremes. This has been a timely indicator historically.

If you're not taking profits now, when? If you're not hedging now, when?

Waiting for the correction makes everything harder and more expensive. You'll end up buying in-the-money puts or using futures - much messier strategies.

The Choice

QuantumScape went from $4 to $15. Virgin Galactic from $2.75 to $4.60 (after hitting $6.50 before the last decline).

These could be down 40% tomorrow. With earnings season ramping up and multiple risk events converging, this seems like as good a time as any to book gains and reduce risk.

The market is telling you through options pricing that volatility is coming. The skew is telling you downside risk exceeds upside potential.

That, my friends, is significant information you can act on.

Don't wait for the correction to make everything harder and more expensive.

Take Care,

Brandon Chapman