|
You see the breakout after it's already up 40%. |
My Ghost Prints scanner sees the volume spike three days before that happens. |
It caught KSS before the 375% run. RKT before the 150% surge in 25 hours. PLUG before the 206% climb in 5 days. |
Right now, it's flashing on multiple setups. And what it's showing explains why December might not deliver the rally most traders expect. |
👉 JOIN ME LIVE MONDAY 7PM EST. |
|
How to Fade the Biotech Squeeze |
By Brandon Chapman, CMT |
Markets don't believe in Santa Claus...but traders do. |
Every December, the same pattern emerges. Traders convince themselves this time of year magically produces positive results. Then reality hits. |
Pull up the sector performance list from Friday. |
Energy led. Financials rallied. Gold sat near the top. |
Gold doesn't rally during risk-on environments. High beta names just squeezed higher for four straight days. |
Rate cut odds jumped from 30% to 82% in one week. Gold rallying in that setup means someone is positioning for what comes next. |
Materials stocks outperformed the S&P 500 by 5% this week. XLB rallied 6%. |
When materials lead during a rally, institutions aren't chasing momentum. They're rotating into defensive positioning. |
Market signals are everywhere. The volume on SPY is the easiest way to confirm it. |
Tuesday's volume came in at half of the previous Friday's level. That's not holiday trading. That's liquidity disappearing. |
The VIX 3-month to 1-month ratio is knocking on the door of 1.20. That's the same extreme we saw on October 27th, right before the market corrected 5%. |
Skew sits at 1.45. When that indicator rises, hedges are being put on. |
Now, here's where it gets interesting. The Ghost Prints Console flagged institutional hedging activity in the exact sectors still rallying. |
Let me show you what that means and why it matters. |
Understanding Delta: The Language of Market Maker Hedging |
When institutions buy or sell options, market makers take the other side. But market makers don't want directional risk. They want to collect the spread and stay neutral. |
To do this, they hedge using the underlying stock. |
Delta measures how much an option's price moves for every $1 change in the stock price. You can think of delta as the equivalent number of shares the option controls. |
A call option with a 30 delta acts like owning 30 shares of stock. A put option with a 30 delta acts like shorting 30 shares. |
When a market maker sells a put option to an institution, they're now long delta (bullish exposure). To neutralize that risk, they sell shares short to get back to zero. |
Here's what the Ghost Prints Console caught this week: |
QQQ: 27,000 put contracts traded in a single block. Someone rolled from $585 strikes to $605 strikes. |
|
That's a move from a 12 delta hedge to a 30 delta hedge. |
Translation: institutions just increased their downside protection by 150% while the market was rallying. |
XLP (Consumer Staples): 3,000 put contracts hit the January $77 strike after the sector rallied 3% in a week. |
|
When institutions hedge both tech (QQQ) and defensive sectors (XLP) simultaneously, they're not protecting against a specific sector risk. They're protecting against broad market two-way action. |
Now, let's connect this to the trade opportunity. |
Why Biotech Is the Most Vulnerable Sector Right Now |
Biotech has exploded higher over the past week. XBI rallied from $107 to $123 in just four trading days. |
That's a 15% move in a sector known for volatility, but this move came with a specific pattern that creates opportunity. |
|
XBI traded above the upper Bollinger band for four straight days. |
For those unfamiliar, Bollinger Bands measure standard deviation. When price trades outside the bands, it means the stock is making a statistically extreme move. |
One day outside the bands can happen. Four consecutive days is rare. |
Here's what makes this setup compelling: institutions are aggressively hedging the broader market while biotech remains the most extended sector. |
XBI currently trades at $123. The recent low sits around $95. |
A 50% retracement of that move would take XBI back to $109. That's only an 11% pullback from current levels. |
But we don't need an 11% move to profit. We just need a modest reversion. |
The Trade Structure: How to Use a Put Spread |
Most traders avoid put options because they're expensive, especially on extended stocks with elevated implied volatility. |
That's where a put debit spread becomes useful. |
Here's the structure: |
|
Let me break down what this means. |
When you buy a put spread, you're buying the right to sell XBI at $120 (the long put) and simultaneously selling someone else the right to sell it to you at $118 (the short put). |
Your maximum loss is the $80 you paid to enter the trade. This happens if XBI stays above $120 at expiration. |
Your maximum profit is the width of the strikes minus your initial cost: ($120 - $118) - $0.80= $1.20, or $120 per spread. |
This happens if XBI trades below $118 at expiration. |
But we're not holding to expiration. We're targeting 70% of the maximum profit. |
Here's why that matters. |
Why 70% Is the Right Target |
Put spreads behave differently from single puts because you're working with two options moving in opposite directions. |
When you buy the $120 put and sell the $118 put, you're creating a position with defined profit potential. |
As XBI drops, your long $120 put gains value faster than your short $118 put. The closer XBI gets to $118, the closer your spread gets to its maximum value of $2.00 (the width between strikes). |
But here's the key: the final 30% of profit requires the most movement. |
Think of it like this: getting from $0.80 to $1.64 (70% of max) might only require XBI to drop to a few percentage points. |
Getting from $1.64 to $2.00 (the final 30%) requires XBI to fall a whole lot more or wait until we're near expiration. |
That's because as your spread moves deeper in-the-money, both options start behaving more like the stock. The delta difference between them narrows, slowing your profit acceleration. |
At 70% of max profit, we're capturing $84 in profit on our $80 initial investment. |
Why This Trade Works When Institutions Are Hedging |
The institutional put buying in QQQ and XLP tells us something critical: smart money expects volatility, not a straight-line rally into year-end. |
When market makers sold those puts to institutions, they had to hedge by selling the underlying stocks. That creates subtle selling pressure even as prices rally. |
Biotech, meanwhile, carried none of that hedging activity. It's pure momentum with no institutional protection underneath. |
That makes it the most vulnerable sector when the market gets two-way action. |
The other factor working in our favor is mean reversion. XBI makes extreme moves regularly, but those moves tend to snap back faster than broad market indices. |
Four days above the upper Bollinger band is statistically extreme. Reversion to the mean doesn't require a bearish thesis. It just requires normal market behavior. |
Why Ghost Prints Subscribers See These Setups First |
Most traders see a sector rallying and assume they missed the move. |
Ghost Prints subscribers see institutional positioning that contradicts the surface action. |
The Console caught the QQQ and XLP put activity before anyone was talking about hedging. It flagged the exact delta levels institutions were targeting. |
That's the difference between reacting to price and anticipating the next move. |
I'll walk through several similar setups live on Monday's Ghost Hour at 11:30 EST. |
You'll see how to identify institutional hedging in real-time, structure spreads that capture mean reversion without overpaying, and manage positions as volatility develops. |
The market just shifted into defensive positioning while prices keep rallying. The question is whether you're trading the setups with the most extreme divergence. |
Register for Monday's Ghost Hour Session |
Brandon Chapman, CMT
Creator of Ghost Prints |
0 Response to "How to Fade the Biotech Squeeze"
Post a Comment