Crude oil is rallying, bonds are selling off, and the stock market is under pressure. Investors sold Big Tech stocks after earnings and the 10-year Treasury yield just touched 4.7%, the highest since January 2025.
In many ways it looks like the setup from March that presaged a monthlong sell-off in stocks as the Iran war escalated beyond investor expectations. Yet the S&P 500 is not even 3% off its record. The index is trading above last month’s lows, and it’s at a level it first reached in May.
The S&P 500 in the past month
To find clues on whether the stock market is going to get more volatile or break down further, options traders are monitoring what a buildup in trading around specific levels in the S&P 500 says about the positioning of big institutional traders who supply liquidity by buying and selling securities.
Evidence suggests these market makers were likely “long gamma” for at least a month leading up to this week, meaning they owned options that pay off with volatility. When the market dips, they balance their puts by buying stock. When the market rips, they balance their calls by selling stock. Based on an analysis of data from SpotGamma, Barchart and Cboe LiveVol, the biggest positions were concentrated around the 7,500 level in the S&P 500.
These areas of activity can act as guardrails on the highway of trading, creating areas of support and resistance, but they are not impervious to rupture. Options traders see it as the main reason the S&P 500 has stayed mostly within a 200-point range since mid-May.
If the index moves too far from market makers’ comfort zone, that positive gamma can flip negative. This means the market makers, often called dealers, are the ones that have to play catch-up, adding to volatility instead of subduing it.
That flipping point was at 7,500, according to Barchart’s volatility model, meaning traders may no longer be able to count on consistent dip-buying. If the State Street SPDR S&P 500 ETF Trust (SPY) falls below 740 – where dealers have the most gamma exposure – that would heighten the risk of a big sell-off.
“We are in a negative gamma regime,” said Brendan Herbert, options product manager at Barchart. “If we drop, market makers are going to have to sell to cover deltas so they could in theory make a downward move more intense.”
Brent Kochuba, founder of SpotGamma, wrote in a note to clients Thursday morning that while the degree of positive gamma in the market has lessened, there is still a “fairly light amount of positive gamma” through to the 7,300 level.
Kochuba added that the S&P 500 has fallen below a “risk pivot” and that he’d be adding to short-dated, cheap, out-of-the-money put “flies” with bearish directional bias.
