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It looks like the good times are rolling. The S&P 500 is testing new highs, and it’s easy right now for traders to become enamored with the market and run out and buy stuff. The retail investing feeding frenzy is real, and it’s no coincidence that margin debt is one of the biggest drivers of M2 money supply expansion in recent months.  

For smart traders, though, the smart move is to take a measured approach, assess the market risk at various points, and to use that as an opportunity to take profits and even consider hedging. 

During my Tuesday TheoChat session, we looked at the state of the market - and how to hedge a long stock portfolio and use VIX options as a hedge. 

You may be asking, “times are good - why hedge now?” 

Well, I’m a big believer in the first-mover advantage - just like it says on the masthead. A good hedge is always a good idea, but some of the most powerful hedges are attractively priced right now. 

But, more importantly, I’m seeing signs that volatility will return sooner, not later. Let’s take a look… 

Why a Good Hedge Makes Sense Right Now

As I said, my approach to the market is looking for opportunities based on a first-mover advantage. When evaluating market risk, looking at institutional expectations for volatility and hedging is a big tip-off that something may be about to happen. 

Don’t get me wrong: I’m not suggesting you need to exit the market. But by all means look to take some profits and hedge the downside.  

Here are the two key indicators that tell me volatility is in the mail:

1. Volatility expectations are at the highest level since Christmas Eve, levels also seen on December 10, 2024 and November 29, 2024. This trigger is when the three-month VIX (VIX3M) is 20% higher than the 30-day VIX (VIX). Take a look at the chart below…

2. Institutional hedging is at an all-time high. This means that the SKEW Index (SKEW) is trading at a historically high level. (Like the VIX, SKEW looks at options activity and can be a good proxy for sentiment and volatility; it’s a lot more complicated than that, but this quick definition is what traders need to know.) On Tuesday, the index finished at 183.12! This is a reflection of the surge in hedging activity over the past week. 

In trading, there are no certainties, and survival is about managing risk. Looking for ways to reduce market exposure and take profits is a hallmark of good money management. 

After all, it’s easier to keep your money than make it back. 

One of the ways I clinch the first-mover advantage is following institutional trades in the options market - I call these “Premove Options Pulses”

Get to Know the Premove Option Pulse

One of the ways I keep first-mover advantage is by following institutional trades in the options market. I call these types of trades “Premove Options Pulses.”

In tracking today’s option pulse activity, I settled on three stocks that saw significant activity. These trades indicate potential because large option trades can help propel the price through a process called a gamma squeeze. Very simply put, a gamma squeeze is a sudden large increase in a stock’s price; this happens in part because big market makers have to buy more stock to hedge their own positions. 

When a gamma squeeze occurs in stocks with high short interest - where many big players have borrowed shares in hopes of making money on a stock’s plunge - and the potential move can be impressive. 

Premove Pulse No. 1

Rigetti Computing, Inc. (RGTI)

RGTI is a quantum computing stock and is part of a group that received a lot of attention this week following Microsoft Corp (MSFT) announcing its breakthrough with its Majorana 1 chip. (I discussed the quantum space and RGTI in this video.)

What I see: The call volume for RGTI was over two times the five-day average and saw 38% of the calls fill at the ask price. There were multiple contracts being bought, but early on the February 21, 2025 $10.50 calls were mostly bought as the closing volume was 6,909 compared to 1,716 open interest. 

Premove Pulse No. 2

PDD Holdings Inc ADR (PDD)

PDD has been on my bullish list since January 27, 2025. I had a target of $133 on the stock, which it almost tagged on Tuesday with a high of $130.77. However, today’s pullback is representative of the risks of Chinese stocks in achieving a higher multiple. As a result, today’s put option activity pointed me to place an announcement in chat to close the position. While Chinese stocks may not be ready to fall rapidly, this environment represents significant risks due to tariffs and yuan devaluation. 

What I see: Tuesday’s put option activity was below average with the volume only 75% of the five-day average. However, 45% of the puts traded at the ask, which indicates buying. Specifically, the February 21, 2025 $123 puts saw a volume of 3,684 against an open interest of 398. Most of the volume occurred in one print of 2,999 contracts that were likely bought. 

Premove Pulse No. 3

Occidental Petroleum Corp (OXY)

OXY is consistently discussed because Warren Buffett has taken a large stake in the company. With Wednesday’s move of 4.40%, it’s right at the same price level as Buffett’s acquisition price for the company. Today’s move followed an earnings report that saw the company beat analyst expectations. With oil prices holding in arange, the company showing increased profitability, and an announcement that they are raising the dividend, it makes today’s breakout interesting as a trade and as an investment. More on that in a second:

What I see: Tuesday’s option activity finished with more than 2.55X the five-day average volume with 35% of calls filling at the ask (buying) and 38% of puts getting filled at the bid (selling). It was the February 28, 2025 $52 calls that saw a lot of buying activity today and is helping to support the news and technical breakout.

In honor of our first issue today, I’ll show you how I’d play OXY right now

The Set-up: OXY triggered my Keltner Swing Trade entry signal by crossing above the 50-day simple moving average and the 10-day exponential moving average (EMA) on above average volume. With the price closing above the upper Keltner, the idea is to take one-half the allocation and add the other half on a future signal. The stop is placed at the lower Keltner channel and raised to the lower Keltner when the price crosses below the 10-day EMA.

Entry Price: $50.99

Stop Price: $47.33

Price Target: $60

Option Alternative: Long Call Vertical

For this trade, you’re buying a call that is closer to the stock price and selling a strike that is further away. This would be placed as a single spread trade and would be done for a debit. 

BUY to Open Vertical Call Spread – OXY

Trade Details:

• Buy 1x 21 MAR 52.50 Call
• Sell 1x 21 MAR 55 Call
• Debit: $0.55

Order Type: Limit Order at $0.54 (Adjust if needed)

Upon entry, you can place a good til canceled (GTC) limit order to close the trade for a 70% gain (Debit x 1.7). If filled at $0.55, that would be a limit price of $0.94. 

Here’s What You Need to Know Today

Despite the bullish “vibe,” market conditions are uncertain. A 5% to 10% correction is certainly a possibility - one we’re now protected against. But that doesn’t mean you stop looking for bullish trades. There are dynamics that can play out quickly and may even move counter to the market. That said, being aware of your directional exposure is key and adding bullish exposure will depend how directionally biased you are. We’ll talk more about that soon.  

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