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Thursday, July 25, 2024

Options Expriation Day – Back Where We Started!

"And now we're back where we started,
Here we go round again.
Day after day I get up and I say
I better do it again.

Where are all the people going?
Round and round till we reach the end.
One day leading to another,
Get up, go out,
do it again." – Kinks

That's right, we often talk about various market scams but there is no bigger scam in the world than options expiration day when all the stocks are herded back to prices that benefit the largest number of SELLERS of options while the buyers of options can only stare in shock as momentum shifts and trend-lines break and stock after stock magically settles into a value that wipes out the most possible premium.  There is something in options called the "Max Pain Theory" that says that stocks will always settle at the strike where the most puts and calls expire worthless but I think that's a self-fulfilling prophesy as options activity tends to center around the strike as it moves so of course the strike is surrounded by the most options.

What isn't a theory is what we can observe happening time and again.   This is why, at PSW, we primarily SELL options, not buy them.  Buying options is gambling, selling options is a business!  I often point out to members that options is the game in the world where you can be the "house" with no disadvantage.  In Las Vegas, you can bet with the house but they still have an edge but in options, there is no edge and day's like this remind us why selling options beats buying them – not EVERY time but certainly OVER time. 

Our last option expiration day was June 19th and I will give you today's levels to watch because they are the levels of June 19th:  Dow 8,540, S&P 921, Nasdaq 1,827, NYSE 5,934 and Russell 512.  All the markets have to do to take out the calls sold that day for a nickel or a dime is to hit those levels at some time today.  Of course, anything within 2.5% of those numbers is fine to as you can roll the calls you sold to the next month at no cost, collecting another premium for another month.  This is the centerpiece of our Buy/Write strategy, which we discussed last weekend and I will be putting up a new Buy List for Members this weekend as we now have about 30 of those plays from the past two weeks to review.

So all the excitement of the Dow going down 500 and then up 700 is all nothing in the grand scheme of things and we're right back where we were, or close enough to make option sellers happy.  And how did we get here?  Well mainly it was Meredith Whitney kicking off another media frenzy with her "bullish" change of heart.  Since that worked so well the MSM, led by CNBC yesterday, took Nouriel Roubini's latest comments so out of context (causing the 1:30 rally) that he specifically wrote an article complaining about it!  This morning, CNBC had the nerve to make fun of Roubini for "changing his tune."  Don't forget CNBC is owned by GE, who reported mixed results this morning and need a strong market to keep their shares up around $12.10, where they were on June 19th.

As you can see from David Fry's S&P chart, we are back in the top of our range and our last play in the $5,000 Virtual Portfolio yesterday was as speculative short using the DIA $87 puts at .57 (looking for .80+ today) as we expected some pullback today since we knew that Roubini was being quoted out of context (unlike the sheeple, we actually read the originals) and we also did not expect GE, C and BAC to be thrilling enough to justify a 10% rally on Whitney's say-so.  If you want trading ideas for the market, just go back to my June 19th post as I was suggesting members take bullish plays off the table, buy the QID $31 calls and the DIA $86 puts – the only difference is we can now change July to August for our strike month. 

Indeed GE, BAC and C were not that thrilling.  Don't get me wrong, we are the proud owners of GE and C in our $100K Virtual Portfolio and we are, of course, reaping the benefits of the same manipulation I like to complain about.  As I often say: "We don't really care IF the game is rigged, as long as we know HOW it's rigged so we can place our bets accordingly."  GOOG had a nice beat but a little light on revenues and we'll see how close they get to June 19th's $420.  We had a bullish play on GOOG last week but cashed it out on that run-up ahead of earnings and I'm willing to go bullish again if they give us a nice run back near $400.  IBM crushed numbers and I doubt they'll get back to last expiration's $106 today – if they do, I'll buy some!  Next week is light on data and our last data point of this week is Housing Starts, which beat expectations by 10% so no excuse for the bulls today not to keep things going if this rally is real

The rally seemed real enough in Asia, with the Hang Seng running up another 2.5% on the day.  The Nikkei was up half a point and the Shanghai held flat, still up 75% for the year – perhaps waiting for others to catch up to 50% gains (Hang Seng needs 21,000, Nikkei has no chance but 50% off the bottom would be 10,500) before making a break for 100% gain.  India jumped 3.5% and the Baltic Dry Index added another 5% and is back to 3,500 so expectations, at least, are very bullish in Asia.

Iceland EUEU stocks are up about half a point (9am), a bit off the highs but still fairly happy.  Financials are leading day 5 of the rally with the DAX matching the S&P as the top performing market, up 2.5% on the nose since last expiration day.  As we expected, NOK posted poor results but they took most of their medicine yesterday as one of the market's biggest losers.  Iceland did agree to join the EU after 6 days of debate and that's an encouraging sign.  Just ahead of the US open, the dollar is dropping like a rock against the Euro and other currencies and that is, of course, boosting commodities and the broader market, erasing all pre-market losses.  Isn't that special?

While we are comfortable getting back to the middle of our predicted range at Dow 8,650 et al, we're not happy with the low-volume super-rally that got us here this week so we will remain a little skeptical and cautious into earnings.  The Philly Fed Index was a disaster yesterday, coming in at -7.5 vs estimates of -4.8 and significantly worse than June's reading of -2.2 with zero being the expansion/contraction line.  The six-month outlook for general business activity dipped to 51.9 from 60.1 in June.  New orders (-2.2) edged in the right direction from a -4.8 reading for June, yet they still haven't tipped into an expansion phase.  Shipments, meanwhile, tilted back to a contraction reading at -9.5 versus 2.1 in June.  These are not the kinds of numbers you expect to break overhead resistance with….

We'll just have to see which way things go, they are manipulating the currency markets so it seems like the powers that be REALLY want to see a good finish to this week.  It really only matters to the Dow how IBM does as they outweigh C, GE and BAC by 4 to 1 in the price-weighted index.  The other big Dow movers, XOM and CVX, will be very dependent on whether or not oil can hold $62 for the week.  Since last Thursday, the OIH is up 12.5% and the XLE is up 9%.  XLE failed our $48.50 breakout yesterday despite the market move and OIH is right at $100 so they make a fun short there with the Aug $95 puts at $3.40 and we can stop out if oil breaks over $62.50 (doubt it).  This is a no trade if oil is over $62, which it may be at the open…. 

Not much trading to do today other than fun, speculative plays on the action.  We are going to be well-covered into the weekend with some speculative downside bets, especially if we don't get a pullback in today's action.  Next week it's all earnings and little data with 1/3 of the S&P 500 reporting and we will continue to pick our spots in the $5KP but I think we'll give it a pass over the weekend.



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