Last week here, I was bullish biased thinking the market wouldn’t do too much as it waited for the Fed, but that it would at least hold up due to all the puts that had potential to act as support. Instead price struggled from the start of the week to push over the puts and a series of events resulted in a nasty sell-off that was likely exacerbated by delta hedging, something I detail here and an important concept to understand. In fact, that potential for it exits next week as well so keep reading.
I am leaving the country this weekend and will not be trading Monday or Tuesday, but of course will be back in front of my screen with popcorn to watch the event of the year ensue. Thus, this post will be brief and to the point.
The market is at oversold levels that have often led to a bounce and at the same time facing multiple risks going into next week, namely the Fed decision and the high yield market/oil. It is also coming into OPEX week, which is historically bullish (especially in December) as well as bullish seasonality. Oh and it’s quad witching. So essentially its a mess trying to put together what might happen.
Here are two things I can offer that may or may not be of value, but probably important to at least keep in the back of your mind.
VIX open interest: The VIX expires Wednesday morning and typically it will expire in a manner that doesn’t pay all those heavy strike call (or put) buyers. So if next week follows the typical script then there is a likelihood for a rally or at least a bounce in the overall market as the VIX falls below the heavy 20 strike. Having said that, given the massive selling on Friday, if VIX continues to stay elevated above 20, it can instead lead to a higher VIX and further sell off in the market (as short volatility traders that sold the calls have to cover them as they expire in the money and as long volatility traders buy further out volatility to remain hedged). To sum it up, look for a market rally that sends the VIX below 20 by Wednesday morning as a primary idea. However, if there are no signs of that happening and the market continues to sell off then it can end up being an exaggerated move because of the heavy VIX 20 calls being in the money and possibly all the high strikes above 25 if those were to go in the money. 
SPY open interest: In a similar vain, given that there is a very heavy put strike at the 200 level on SPY, there is high probability that price remains above there or quickly gets above there if it dips below. The best pin would be 205 and upon any rally early in the week could be a target going into the Fed decision on Wednesday. Having said that, with all those puts that begin lining up at 205 (and with price already below there), any news the market doesn’t take in stride could lead to more waterfall like moves. On the flip side, should the market bounce off of oversold levels and rally it has potential to get above all those puts to the 205 level. With so many shorts expecting lower prices any further rally from there can squeeze all the way to 210 before facing any call resistance.
In sum, the market is oversold, with a historically bullish OPEX week, strong seasonality that begins mid-next week, a VIX that typically would close below the heaviest call strike (20) and SPY that would typically close above the heavy put strikes. At the same time, it faces the risk of further selling due to high yield, oil, fed, etc and delta hedging that would exacerbate the move. In other words, next week is a sh*t show so rest up and good luck :-).
For more about delta hedging and what happened last week
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Tags: day trading, delta hedging, markets, max pain, open interest, options, pinning, S&P 500, SPX, stocks, volatility
The Countdown is Finally Over
Last week here, I was bullish biased thinking the market wouldn’t do too much as it waited for the Fed, but that it would at least hold up due to all the puts that had potential to act as support. Instead price struggled from the start of the week to push over the puts and a series of events resulted in a nasty sell-off that was likely exacerbated by delta hedging, something I detail here and an important concept to understand. In fact, that potential for it exits next week as well so keep reading.
I am leaving the country this weekend and will not be trading Monday or Tuesday, but of course will be back in front of my screen with popcorn to watch the event of the year ensue. Thus, this post will be brief and to the point.
The market is at oversold levels that have often led to a bounce and at the same time facing multiple risks going into next week, namely the Fed decision and the high yield market/oil. It is also coming into OPEX week, which is historically bullish (especially in December) as well as bullish seasonality. Oh and it’s quad witching. So essentially its a mess trying to put together what might happen.
Here are two things I can offer that may or may not be of value, but probably important to at least keep in the back of your mind.
VIX open interest: The VIX expires Wednesday morning and typically it will expire in a manner that doesn’t pay all those heavy strike call (or put) buyers. So if next week follows the typical script then there is a likelihood for a rally or at least a bounce in the overall market as the VIX falls below the heavy 20 strike. Having said that, given the massive selling on Friday, if VIX continues to stay elevated above 20, it can instead lead to a higher VIX and further sell off in the market (as short volatility traders that sold the calls have to cover them as they expire in the money and as long volatility traders buy further out volatility to remain hedged). To sum it up, look for a market rally that sends the VIX below 20 by Wednesday morning as a primary idea. However, if there are no signs of that happening and the market continues to sell off then it can end up being an exaggerated move because of the heavy VIX 20 calls being in the money and possibly all the high strikes above 25 if those were to go in the money.
SPY open interest: In a similar vain, given that there is a very heavy put strike at the 200 level on SPY, there is high probability that price remains above there or quickly gets above there if it dips below. The best pin would be 205 and upon any rally early in the week could be a target going into the Fed decision on Wednesday. Having said that, with all those puts that begin lining up at 205 (and with price already below there), any news the market doesn’t take in stride could lead to more waterfall like moves. On the flip side, should the market bounce off of oversold levels and rally it has potential to get above all those puts to the 205 level. With so many shorts expecting lower prices any further rally from there can squeeze all the way to 210 before facing any call resistance.
In sum, the market is oversold, with a historically bullish OPEX week, strong seasonality that begins mid-next week, a VIX that typically would close below the heaviest call strike (20) and SPY that would typically close above the heavy put strikes. At the same time, it faces the risk of further selling due to high yield, oil, fed, etc and delta hedging that would exacerbate the move. In other words, next week is a sh*t show so rest up and good luck :-).
For more about delta hedging and what happened last week
For intra day analysis and real time trades consider joining us.
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Tags: day trading, delta hedging, markets, max pain, open interest, options, pinning, S&P 500, SPX, stocks, volatility