Don Kaufman here.
And welcome to what might be the most expensive lesson in market psychology you'll see this week.
I just closed out Christmas tree spreads for over 50% gains in less than a month. You'd think I'd be celebrating, right?
Instead, I'm getting the hell out.
Why?
Because those trades should have made a hell of a lot more money, a hell of a lot faster. And when profitable trades don't behave like they should, that's your market screaming something is deeply wrong.
This morning, the market is pricing the S&P 500 to move only 115 points through the biggest earnings week of the year.
Google, Apple, Amazon, Microsoft, Meta all reporting. Plus the Fed decision, plus Trump meeting Xi Jinping on Thursday.
We already moved 65 points TODAY just on China trade deal news. And yes, this is the fourth or fifth time we've traded higher on the exact same "framework" announcement since April.
But here's what's got me spooked.
The $3 trillion options market is telling a different story than the headlines.
I've been selling out-of-the-money puts 81-116 days out.
Christmas tree spreads where I own one strike and sell three others, all way below current prices. When markets rally 100+ points, those puts should get absolutely crushed in value.
They're not. They're holding value like someone keeps buying them.
You want to know how I know there are put buyers out there? Because when you sell something as far out of the money as I'm selling it and the market moves up 100 points, those puts should lose value fast.
Instead, there's definitive put buying happening way out in time. Not necessarily big size, but continuous.
Like institutional money quietly hedging while everyone else celebrates China deal #5.
This is what hedging looks like when smart money doesn't trust the rally.
This hedging doesn't show up in VIX because VIX is only 30 days out. Big institutions buying SPX puts 80-120 days out where nobody sees them, nobody worries about it, and they can hedge quietly against something going wrong over the next three months.
The volume this morning was absolutely anemic.
We were not even averaging 3,000 contracts a minute in S&P futures. That's everybody sitting back with arms folded, waiting for somebody else to do something.
You want to see real participation?
Gold did 163,000 contracts overnight because everybody that trades gold traded it. But in the S&P, where we're supposedly having this massive risk-on rally? Light and fluffy for this kind of price action.
So when I see put buyers way out in time, massive moves on light volume, and my profitable spreads not exploding higher like they should - I take my profits and get out.
"Get out while the getting's good" isn't just trading advice. It's survival.
Because if this marketplace starts to sell off even slightly, they're not going to let you out of these positions.
The same lack of participation keeping volume light on the way up will make it brutal on the way down.
The beautiful thing about trading is you don't have to predict anything.
You just listen to what the market is actually doing versus what it's supposed to be doing.
Right now, it's supposed to be crushing out-of-the-money puts on a 60-handle rally with massive participation. It's doing neither.
Those are facts, not opinions. And facts don't care about your China trade deal optimism.
I've been doing this since the late 90s on the Chicago trading floor. When markets move 100+ points and your short put positions don't behave right, that's not a glitch. That's information.
Smart money is positioning for moves in BOTH directions while headlines are all one-sided bullish.
When I see that kind of two-sided hedging, I listen to the hedging.
So yes, I made over 50% in less than a month and closed early. Yes, I'm shopping for opportunities to fade this rally if we get decent two-sided trade.
Because the options market is telling me this 115-point expectation is wrong.
The question is: wrong in which direction?
To your success,
Don Kaufman