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Don Kaufman here. |
Most traders saw Friday's 2.7% selloff and thought "buying opportunity." |
I saw something that made my blood run cold: we nearly hit backwardation in a single trading session. |
Let me explain why that should terrify you - and what it means for next week. |
When Markets Scream "This Isn't Normal" |
While everyone fixated on the S&P dropping 2.7%, something far more dangerous happened: volatility exploded +30% in four hours. There's literally one-third more risk priced into the world than there was this morning. |
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But the crazy part? |
We came within a few cents of volatility backwardation - when near-term volatility eclipses longer-term volatility. |
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This usually takes weeks of sustained stress to develop. We nearly got there in one session. |
When November volatility trades at 21.38 and December at 21.40 - basically flat - you're not dealing with normal profit-taking. |
You're dealing with genuine fear that this volatility has staying power. |
Stop Looking at the VIX - Focus on What Actually Matters |
Everyone's obsessing over VIX numbers. Wrong metric. The VIX isn't even tradable - it's volatility theater for CNBC. |
What matters is volatility futures structure. |
The VVIX - volatility of volatility - spiked to 116, signaling even professionals are scrambling to hedge. When the smart money gets nervous about volatility itself, you better pay attention. |
The Expected Move Just Doubled Overnight |
This past week, the SPX had a $94 expected move. Friday afternoon? We're looking at $175 for next week, with potential to hit $200. |
That's not gradual market repricing. That's explosive recognition that the calm we've enjoyed is over. |
More concerning: we broke below the lower edge of this week's expected move and kept falling. When that happens, dealer gamma forces systematic selling - the market structure itself becomes a selling accelerant. |
Why Buying Calls Will Destroy You Right Now |
I know what you're thinking. "Don, this selloff is overdone. Time to buy the dip." |
Fine. But if you buy a call right now, you're committing financial suicide. |
When these stocks inevitably bounce - and they will - the first thing that happens is volatility crush. |
Those out-of-the-money calls you're buying? They're pure extrinsic value. |
You'll watch the stock rally 5% and your calls lose money. |
It's mathematical torture. |
Use spreads. Define your risk. |
You get bullish exposure without getting vol-crushed into oblivion. |
The Bitcoin Reality Check Nobody Wants to Hear |
Think you'll hide in Bitcoin? Bitcoin dropped 4% Friday, proving what I've been warning about for months: Bitcoin has become nothing more than a high-beta stock. The correlation with the S&P is damn near one-for-one. |
You thought you were special, Bitcoin. You're just one of the gang now. |
The Weekend That Could Change Everything |
Bond markets are closed Monday. Electronic trading will be thin. If China retaliates over the weekend, or if any major news breaks, there's going to be panic with nowhere to hide. |
That's why I'm concerned about crypto specifically. People will try to front-run Monday's chaos by dumping crypto positions over the weekend. With thinner liquidity, that could get ugly fast. |
Why This Bubble Won't Pop Like You Think |
I'm not calling this the end of the world. But the easy ride is over. |
This bubble won't pop overnight with a dramatic 20% crash that gives everyone clarity. It's going to be psychological torture. Rally, sell off, rally higher, sell off lower. Lure people in, shake them out, repeat. |
We're entering what I call "hell in a handbasket" territory. Getting out cleanly is going to require surgical precision, not hope. |
What This Means for Next Week |
We're not dealing with normal market dynamics anymore. The volatility structure tells me this stress isn't going away quickly. When markets nearly hit backwardation in a single session, you're looking at prolonged turbulence. |
I'll be watching three things: |
Whether we actually hit backwardation Monday How crypto trades over the weekend Whether dealer gamma continues forcing systematic selling
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This is where careers are made and destroyed. The traders who understand volatility structure will profit. The ones chasing momentum with naked calls will get obliterated. |
The Bottom Line |
Friday wasn't about Trump tweets or China tensions. Those were just matches thrown at a powder keg. |
The real story is a volatility structure screaming that calm seas are over. When markets can nearly hit backwardation in four hours, you're not dealing with normal profit-taking. |
You're dealing with fundamental regime change. |
Strap in. It just got real in a hurry. |
To your success, |
Don Kaufman |
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