“… I see the mark of the round 4,100 century as a critical level. Not only is this level the location of the breakout above its channel in mid-April, but with the SPX’s 50-day moving average rising by about 30 points per week, it is projected to be near 4,100 by the end of the week, and that lower bound of The channel will be at 4,104 on Friday … with no spark to bring the ball back to the 405 strike, it will be a quiet week of expiration from an options standpoint, with the SPY more than 11 points above the $ 405 -Level. However, with $ 405 touched three trading days ago, the delta hedge sell scenario is a worthy mention. ”
– – Monday morning view, May 17, 2021
The week of expiration was a reflection of the previous week. The S&P 500 index (SPX – 4,155) hit its low on Wednesday for the week after it sold earlier in the week. In fact, buyers have been doing roughly the same for the past two weeks, with the SPX trading at 4,057 two weeks ago and last week’s low at 4,061.
According to the above excerpt, given the week of expiration, it was of paramount importance that the SPX-linked Exchange Traded Fund (ETF) or the SPDR S&P 500 ETF Trust (SPY – 414.94) held above the put hit hard. Breaking below this level would have left stocks vulnerable to accelerated selling, as put sellers at the 405 strike and strike prices immediately below could have been forced to sell more and more S&P futures for hedging.
Instead, after a rebound from near the previous week’s lows, these put sellers have likely closed the remaining short futures positions and generated a mirror-like rally into the 4,150 area from last week.
The graphic below concludes with the 50-day moving average – the lower trendline of a channel since mid-November – and the mark of around 4,100 centuries when a breakout occurred above the upper limit of the channel in April – all of which acted collectively as Support zone. Additionally, the intraday low at 4,061 was just a few points above the level that marks six times the 2009 low that I’ve highlighted several times this year.
Looking ahead to this week, I continue to see the SPX’s 4,100 level as a critical level of potential support as this is the lower bound of the channel at the start of the week and the planned location of the 50-day moving average during the week. In addition, as mentioned earlier, it is the level from which a breakout occurred above the upper limit of the channel in April. By the end of the week, the lower bound of this channel is expected to be 4,126. The resistance at the beginning of the week is at the upper limit of the channel or in the 4,245 area which happens to be around the intraday highs earlier this month.
I would like to come back to the rally from last week’s low and what may have been at work. At its lowest intraday point last week, the SPX was about 100 points below the previous Friday’s closing price, and by early Thursday afternoon it had closed and traded again near the close of trading on May 14th. However, the rally felt different than the previous week in terms of the type of stocks that rebounded.
Hence with www.finviz.comI have captured the sectors that performed best during the expiry week from Thursday afternoon onwards. In the graph, I’ve included the performance of each sector for the month.
The table immediately below, ordered by the best sectors from Friday May 14th through Thursday May 20th, shows that sectors that rallied from the SPX low two weeks ago moved after the low were not the front runners during the expiry week. This month’s leading sectors fell last week, while this month’s red numbers were the leaders of last week.
I took the above observation one step further. Not only may the expiration week have a potential impact on the behavior of the SPY, but it became apparent after observing the price movement of individual components of the SPX.
With the SPY above strong open position strikes, the subsequent rally was likely aided by the liquidation of some short positions related to open positions.
Similarly, those stocks that traded at or just above high open positions during the expiration week were likely to have benefited from the unwinding of short positions related to those puts. One way to quantify this is to measure the gamma open interest put / call ratio in the previous month (gamma SOIR in the previous month) on a daily basis. The higher the ratio, the higher the open interest in relation to the open interest near the underlying asset. The lower this ratio, the more Call Open Interest there is relative to Open Interest in the event of strikes near the base value. Such stocks were the weakest and this could be due to the liquidation of long positions related to these calls as the expiration date neared.
I think this is noteworthy as the rotation we saw last week (technical leadership and fundamental material weakness) may have been driven by option expiration mechanisms – a liquidation of short positions in stocks closer in the week a strong open interest in May indicates a series and a liquidation of long positions in stocks that are closer to the strong call open interest at the beginning of last week.
This is a concept to consider when planning for the week ahead.
$ VIX tends to have a “secondary” pop after the initial spike. For the second time this year, the second hit the previous high. This VIX move is outside the halfway point of 21 or 18.60 and a trendline connecting lower highs pic.twitter.com/qh2d9jg2go
– Todd Salamone (@toddsalamone) May 19, 2021
$ VIX Settlement Wed on was 25.17 … Huge # put contracts expired worthless … Call contracts of this size used to be the norm. Now $ VIX has space to check before the next big event on June 16. to run lower pic.twitter.com/Iye6whWJo2
– Todd Salamone (@toddsalamone) May 20, 2021
There is another topic related to the impact of the expiration over the past week. Wednesday morning was the expiration and settlement of the futures options of the May Cboe Volatility Index (VIX – 20.15). In that regard, the pop from the VIX half year 2021, which closed at 6:60 p.m. earlier in the week, was pretty timely as the May futures contract with a settlement above 25 resulted in numerous VIX futures put options expired worthless.
From the observation I made on Twitter, it used to be that Call Open Interest was dwarfed, and after a VIX surge in the days or weeks leading up to a standard VIX futures expiration on Wednesday would be the VIX will decrease sharply just before it expires and many calls would expire worthless.
So it may be more than a coincidence that the VIX peak was on Wednesday morning last week after the settlement. Also of note is the closing price below its 200-day moving average. However, as long as the VIX stays above its 2021 half-year high at 18.60, it could indicate a choppy, volatile spike in its channel during the early summer months.
Todd Salamone is Schaeffer’s Senior VP of Research