As the S&P 500 sells off, traders eye key ‘risk pivot’ level

Crude oil is rallying, bonds are selling off and the stock market is under pressure. Investors sold Big Tech stocks after earnings and 10-year Treasury yield It reached 4.7%, the highest level since January 2025.

In many ways, this resembles the set-up in March, which heralded a month-long sell-off in stocks as the Iran war escalated beyond investor expectations. Again S&P 500 It’s not even 3% lower than its record. The index is trading above last month’s lows and is at a level it first reached in May.

To find clues about whether the stock market will become more volatile or worsen, options traders are watching what the surge in trading at certain levels in the S&P 500 says about the positioning of large institutional traders who provide liquidity by buying and selling securities.

Evidence suggests that these market makers were likely “long gamma” for at least a month until this week, meaning they held options that paid off with volatility. They offset their sales by buying shares when the market is down. When the market rises, they offset their purchases by selling stocks. According to analysis of data from SpotGamma, Barchart and Cboe LiveVol, the largest positions in the S&P 500 are concentrated around the 7,500 level.

These areas of activity can act as guardrails on the trade highway, creating areas of support and resistance, but they are not break-proof. Options traders see this as the main reason why the S&P 500 index has remained mostly within the 200-point range since mid-May.

This positive gamma can turn negative if the index moves too far from market makers’ comfort zone. This means that market makers, often called dealers, are the ones who must capture volatility by trying to increase it rather than suppress it.

According to Barchart’s volatility model, this turning point was at 7,500; This means investors may no longer be able to rely on consistent dip buying. If State Street SPDR S&P 500 ETF Trust (SPY) A drop below 740, where dealers have the most gamma exposure, will increase the risk of a major sell-off.

“We are in a negative gamma regime,” said Brendan Herbert, options product manager at Barchart. “If we fall, market makers will have to sell to cover the deltas, so they can theoretically execute a more intense move lower.”

SpotGamma founder Brent Kochuba wrote in a note to clients Thursday morning that while the degree of positive gamma in the market has diminished, there is still a “fair amount of positive gamma” up to the 7,300 level.

Kochuba added that the S&P 500 has fallen below a “risk pivot” and will add “flights” to short-term, cheap, unprofitable puts with a bearish bias.