Crunch Time for Options Traders

The Wednesday before options expiration can often see an intra-day reversal in prices

By Paul Cherney

Near the close of trading on Tuesday, the CBOE equity only put-call ratio (as of 4:00 p.m. ET) was 0.44. That's too low for a normal market and would invite speculation that prices will soon drop. But this low reading (meaning that there were over twice as many call contracts traded for every put contract), is probably not due to excessive call buying, it is probably due to call contract liquidations (owners of call contracts were closing out their positions, selling them ahead of Friday's expiration).

We are near the highs for the quarter and owners of put options don't have profits so they have little impetus to close out losing contracts which have become worth so little that they might not even satisfy the cost of the commission to sell. Time is running out for June dated contracts. This is crunch time ahead of the expirations on Friday and time runs into the expiration, this is why moves in one direction are often counter-balanced as soon as they start to trend because there are people on the other side of the coin who want to limit losses or take profits, too.

The Wednesday before expiration is what I used to call a.m./p.m. reversal day because often, a move at the open (a.m.) does not generate follow-through and prices are headed in the other direction by the time the afternoon (p.m.) rolls around. Usually, in a bull market, it is weakness near the open which does not find follow-through lower and then reverses or at least lifts from its lows, but it can be in either direction.

The S&P 500 is at a layer of resistance 1008-1041 with a focus 1020-1031. A move higher into this focus still seems likely, but it might not happen unless there is a little weakness first.

Nasdaq chart resistance is 1660-1684 with a focus of resistance 1667-1682. Next resistance is 1697-1759 with a focus 1713-1735.

For Tuesday, the VIX will probably have to stay below 22.39 just to create neutral conditions in the market. 22.39 was the 10 day exponential moving average of the VIX near the close of trade on Tuesday. Aggressive buying would probably be in place with prints in the VIX below 21.79-21.48 these prices represent recent low prints.

Support: The immediate intraday support for the Nasdaq is a small shelf at 1656-1651. The next supports are 1636-1622.99, 1619-1610, then 1603-1584.

Immediate intraday support for the S&P 500 is 1006.75-1002.97, then 995-984.

Cherney is chief market analyst for Standard & Poor's

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