A Few Thoughts For This Quarterly Expiration, And The Next

It’s quarterly expiration Friday. Futures, futures options, and index options expired on the open, and after a relatively calm pre-market (despite an attempted late ramp higher), the real action will be in the equity and ETF options that expire at the close. Every time a stock crosses through an option strike, someone needs to re-hedge. The larger the open interest, the more that need increases. As a result of retail investors’ recent embrace of options – mostly calls – there are very large open interests in important stocks and ETFs.I like to keep an eye on lines near the current prices with big open interest, like SPY 330 and 335’s and QQQ 265 and 270’s. Those strikes act like magnets – sometimes they attract, sometimes they repel. It depends who is long and who is short, their relative risk tolerances, and any exogenous news and trends that are in place.

The Nasdaq mega-caps led us on the way up. What happens now that they may be turning over? NDX has been trading below its 50-day moving average since April, and 10-day moving average crossed below the 30-day for the first time since April as well, It is too early to call this a turning point because the long-term uptrend remains in place, but this is a crucial time for a very extended index. With NDX falling below the 30-day moving average that provided support throughout the rally, and now falling below the 50-day moving average, that uptrend may be threatened. And if you worry less about what happens in NDX than SPX, remember –  what happens in NDX has an effect on SPX, since the 6 companies that makeup about half of NDX make up about a quarter of SPX.

(Click on image to enlarge)

NDX Index

The SPX trend was less vertical than the NDX trend this year, with the 50-day moving average providing support rather than the 30-day, but that line has been breached in SPX as well. The worry is that the next major moving average is the 100 day, which is down another 5% from here. But the good news is that the longer-term trends are still pointing higher.

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