OPEX Games: June 14, 2012


With tomorrow being OPEX Friday and the important Greek vote this weekend, the market is in wait and see mode already.  But, we’re on Head & Shoulder watch, meaning the little games that market makers play just prior to options expiration might be a little more predictable.  If you’ll indulge me, we’ll try a little real-time experiment this morning.

We have a small scale H&S setting up in the right shoulder of a larger scale Inverse H&S.  The smaller pattern targets 1280 while the larger one targets 1403.  With those kinds of moves at stake, speculators will jump on board any seemingly significant trend.

June 13, 2012 -- 60-min EOD

Market makers, who rake in a lot of their money writing calls and puts to said speculators, have a vested interest (read: house in the Hamptons) in seeing the market go nowhere (unless they’re sadly underwater.)  But, with no volatility at all, speculators would look elsewhere for action.

So, MM’s engineer moves that look like a break out or break down and write options to suckers speculators who — seeing the move they’ve been hoping for — jump on board.  They’ll let it run a little while, just to make sure they have everyone on board, then let the air out and run the game in the other direction.

It’s been going on for the past week, and yesterday it indicated further downside when the latest RSI fan line was broken.  Having been long since the last turn at 1307, I played along and went short at 1317.

I was no doubt one of many who believed the little H&S might either complete or come close to it around the 1304 level.  Personally, I was hoping for a quick 20+ point round trip (10+ each way.)

9:36 AM

This morning’s opening was mixed, but what initially looked like a back test to a perfectly good decline quickly developed into something more when the back test turned into a fan line violation to the upside.

9:59 AM

I took two points of lumps and got long again.  Sure enough, SPX has started a nice little run to the upside.

10:24 AM


Now, as we approach the purple channel line on RSI and the previous high on the price chart, the upside target becomes a little more clear — probably a little over 1325.   A 10-pt gain should be enough to get bulls salivating over the H&S (the one with the 1403 target) completing.

The way this usually works, the move should fizzle and prices slowly settle back.  Call buyers won’t know what to make of it, but many will hang on — maybe even double down as the excitement fades and bears begin to wake up.

It’s not unusual to see several false breakouts and breakdowns during this period — just so everyone has the opportunity to contribute to the Hamptons summer house fund.  For nimble traders, lots of opportunities to scalp a few points on the churn.

Stay tuned.


UPDATE:  12:55 PM

One of the no-so-fun quirks of WordPress versus the old site’s Blogger is that I’m occasionally logged off for no good reason, without warning.  I might have been logged in all night, with no activity whatever.  But, right in the middle of writing a new post WordPress can kick me off.

It means, say, if I hit the “publish” button and run off to get my daughter to camp on time, I might come back to a page asking me to log in.  Fortunately, the post wasn’t lost.  But, it also didn’t get posted when intended. My apologies.

12:58 PM

SPX slightly exceed our 1325 target, hitting 1326.66 just a few minutes ago.  I’m going to go ahead and take profits here and see if we don’t get a return trip back down.  If we break through the red dashed TL, I’ll jump back in for a trip to 1335 — but with tight trailing stops.

If you’re wondering where this is all going, my inclination at this point is to go into the weekend in cash.  While the outcome of the Greek election is fairly predictable, I don’t like the idea of twisting in the wind while the investing public decides whether it’s good news or bad.

UPDATE:  3:08 PM

No interest in playing these whisper rumors.   I’d be really surprised if it holds.  Staying in cash — probably through the weekend at this point.



OPEX Games: June 14, 2012 — 5 Comments

  1. Hello PW, interesting article about OPEX.   Is there a way to find out if the volume of calls are greater than the volume of puts?   Assuming that the house always wins, the majority of speculators would lose.    So, the volume of calls and the volume of puts could have dictate the outcome before OPEX starts.

      • As to the rest of the question…the house usually wins, but not always of course.  But, yes, I heard once that 95% of long put and call positions expire worthless.  Those are some heavy odds.  There are a lot of people who track the open interest at various strike prices to calculate max pain — the price at which the most people lose out the most money.  It’s uncanny how often the price at expiration is right near that number.  One of my early posts on OPEX might still be worth a read, though I should probably update it.