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Hey folks, Brandon here. |
So I'm looking at SKEW right now and it closed at 152.24 yesterday. Is that high? |
Yes, it's nosebleed. |
But here's what nobody's talking about - and has anyone ever thought of that? That as SKEW rises, what we're seeing is that the upside becomes increasingly more the default position. |
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Think about that for a second. Everyone sees high SKEW and thinks "oh shit, crash coming." |
Wrong. The reality is, SKEW at this level is telling you the exact opposite: small frequent moves UP with a massive chasm growing below. |
So Here's What SKEW Actually Means |
When SKEW rises, we're seeing that downside risks are increasing because they're hedging, right? |
But the realities of hedging means what? It means we're gonna see the large long tail downside risks. |
But here's the key - negative SKEW means the downside tail with a very small upside tail. So not a lot of big moves to the upside, but the mode, the more frequent occurrence, is above average. |
What we're seeing right now being priced in is small frequent upside moves. |
The default position is higher. How do we know that? The SKEW index is literally telling us that. |
At 152.24, institutions are saying: "We expect grinding higher with catastrophic downside protection." |
The chasm below this market is growing, but the default is more up days than down days. That's what SKEW is pricing in right now. |
The Reality Check |
So what happens is you can get really bullish, but the reality of very frequent, small updates is not actually a bullish condition - it's reflection of hedging activity that's driving prices higher incrementally. |
We could certainly go up a day or two or three or four or five or ten, right? |
We've seen the grind where you just go up - the default position's higher. |
But the amount of reward you're gonna get out of this is relatively smaller compared to a month ago, compared to two months ago. |
And that chasm below? It's expanding dramatically. |
The reality right now is that if you are bullish, you have to start looking to temper some of your bullish thought process because that's what institutions are telling you. |
SKEW right now is saying: default position higher, but realize the chasm below this market is expanding. |
What We're Looking At Right Now |
Here's what we're looking at right now: the market's going higher, we're slightly higher today. We're seeing that that's the default position reflected in hedging activity. |
Higher frequency of updates, chasm of downsides expanding. And volatility expectations are rising. |
So now we're pricing in a five to 10% correction with SKEW north of 130. Yeah, ride those bullish trades, but have a plan to exit. |
We're getting back to where we were right at the beginning of June - volatility expectations rising, hedging activity increasing, downside risk accentuated. |
But in all of this, it's gonna push the price higher incrementally. Expect smaller updates. Maybe participation starts to drag, maybe focus shifts to mag seven companies. |
What You Do About It |
The reality is, SKEW at 152.24 means small frequent upside moves with this massive chasm growing below. That's what we're seeing right now. The default position is higher, but the amount of reward is smaller and the downside tail risk is expanding dramatically. |
Your move: When SKEW pushes above 155, start taking profits. |
Trade the grind up, but respect the chasm below. The math is telling you exactly what's happening - frequent small gains with expanding tail risk. |
The default position is higher. But you better have some opportunities to close stuff. |
See you in the chat later today! |
Brandon Chapman |
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