In this Educational Chart of the Week, Options Expiration Alert!
The chart below displays the S&P 500 ETF symbol SPY, with the monthly and quarterly options expirations marked with a vertical line.
It’s a chart I shared with our Advisory Swing and Options Trader letter a couple of weeks ago as part of our market and sector analysis with market internals.
Not every expiration was accompanied by a significant change, but it is evident that this information is valuable for active investors and traders.
The trend is up, and there have been more new all-time highs. All cylinders are firing, some at different power than others. It’s all good, but don’t be complacent.
Here is the intraday 65-minute Dow Futures chart used for biasing lower time entries.
Many turns occurred within days of the expiry, and this Thursday is a monthly expiration. The Advisory letter will take advantage of this to profit in the coming weeks.
You often see:
Rallies fade after options expiration when support from hedging flows disappears.
Pullbacks reverse when put protection rolls off and dealers stop selling the underlying to hedge.
Because many indices are still extended from support and the 20-MA, further correction is needed before they would provide a new bullish setup; however, it is unlikely the markets will decline much until after the expiry.
Markets are holding up well, but it does not mean individual stocks cannot decline a lot, and it does not mean they cannot advance, but are more likely to.
Whatever direction individual stocks are moving, it's better to have the wind at their back – markets moving in the same direction.
The largest open interest strike in S&P 500 puts (bearish bets) expiring this week is 6200, and it is also a price support area, so it is likely to hold near that level.
If the markets are to advance, the largest open interest call strike in the S&P 500 is 6300, and since that is a whole number, it should stall near that area.
Unless a significant break and close occurs, odds are the S&P will be contained close to the recent trading range. And I would not rule out failed attempts.
Master Trader Tip: Market makers who sell options hedge their exposure, and those high open interest strikes can provide “artificial support and resistance,” and through the week, they begin unwinding those hedges.
After expiry, all hedges have been removed, and markets are more likely to move.
At this link, you can get the Advisory Swing and Options Trader for two months for the price of one, plus two free MTS Courses. Plus live monthly coaching sessions, which are recorded for review!
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Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
