Why Some Traders Refuse Winning Trades (1)

People are hunting for the headline that caused this morning's sell-off. 

There isn't one that explains it. The move was already written before the open, in the structure underneath the price.

We've been on top of this since the shift back on the 3rd of June. By the time the bell rang, the structure was already negative. It was baked in the cake.

Let me show you what I mean, because this is easier to see than to define.

When you buy or sell an option, a dealer takes the other side, and they have to hedge it by trading the actual stock. 

Gamma exposure, GEX, just maps where all that forced hedging piles up. And it cuts two ways. 

Where there are calls stacked up, the hedging acts like a brake. It stabilizes the price. Where there are no calls, only puts, the hedging does the opposite. It pours accelerant on the fire. 

Dealers sell into the drop, that drives it lower, which forces them to sell more.

So where are we right now? Look below the price. Bereft of calls. Nothing to stabilize it. Just negative gamma all the way down.

That's why the levels fell the way they did. 

I call them magnets. 

Break one, the price gets yanked to the next. We broke 740 on the SPY. Where'd we go? Straight to 735. Broke that. Pulled to 730. Broke that, reaching for 725. 

No signficant headlines in there anywhere. 

Just no calls below each level to hold it, and negative gamma dragging it to the next magnet. I laid those levels out in the video the night before. They broke in order.

Now here's where most people are getting it wrong. 

They're calling a bottom off valuation. This one's cheap, that one's a generational buy. Cheap doesn't stop a negative gamma regime. 

The dealers don't know what a P/E ratio is. The one thing we can actually predict is what they're forced to do, and right now they're forced to sell every dip and break every level.

So how are bottoms made? 

Not by a stock looking cheap. A bottom forms when the structure flips, when the selling finally runs into enough calls to stabilize the price. We're not there. We've outrun the coverage. There's nothing but negative gamma below.

That's the read. Quit asking what the news was. Ask what the structure is forcing.

— Brandon Chapman