Hey There Income Hunter,
Could it be, as the great Yogi Berra once said “déjà vu all over again?”
Much like March of this year, we’re entering a week that includes both the Federal Reserve’s FOMC meeting and a quadruple witching.
The latter is when derivatives of stock index futures, stock index options, stock options, and single-stock futures expire simultaneously. Positions must be closed or adjusted on expiration, which can translate into significant volume and order flow, especially when so many lapse at once.
The week of March 14, when we had FOMC and OPEX expiration, presented incredible trading opportunities and I think this week will as well.
I closed a couple of big winners in Power Income Trader last week (+82% and +105%) and I have a watchlist of great low risk/high reward trades on tap for this week.
In the meantime …
Today, I’ll review last quarter’s trading and lay out the supporting data for what to look for this week.
March Quad Witching
The chart below highlights the S&P 500 and VIX trend heading into the March 16 FOMC meeting and the March 18 OPEX expiration.
Notice how the SPX traded lower by ~400 points, while the VIX traded from 20 up to 33 heading into the FOMC meeting. Then coming out of the meeting, SPX gained the 400 points back and the VIX traded back down to 19.
June Option Expiration Set-up
Option positioning to start this week is similar to what it was in March.The graph below shows the Put/Call ratio in terms of net delta exposure for each. Notice how readings similar to March (Jan. 2019 and Mar 2020) coincided with sharp SPX trends higher in price.
The reason a put/call ratio down at these levels can trigger a relief rally is simple …
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Real money accounts purchase puts (short stock exposure) into the FOMC …
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Dealers & market makers sell the puts (long stock exposure) and …
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Sell stock to hedge the short put
At the OPEX expiration when the June 17 puts expire, many of the dealers and MMs cover their short stock hedges, which fuels a relief rally.
Well, this week we may see a repeat and traders can either make a play for the rally or use the rally to reset bearish strategies.
The point is to use the option flow internals that can tip the scale in your favor.
Put Option Open Interest
Another good internal indicator that helps give traders an edge is the total open interest by strike.
Notice in the chart below that the 24 puts have the highest open interest (OI) for all puts expiring on June 15.
Historically the highest OI put/call strikes act as strong support and resistance points, and 24 did indeed hold.
Now, the trade is to see how high VIX and how low SPX trades pre-FOMC. The low in SPX is 3,810.32 hit on May 20.
I will be watching closely for an opportunity to put on a bullish SPX or bearish VIX strategy to take into Wednesday’s FOMC.
Bring It Home
Making a new SPX low on Monday or Tuesday and bouncing without setting a new low in relative strength index triggers an RSI/price divergence, which would be a counter trend bullish indicator.
Remember, we are only talking about a relief rally and the bigger trade will be to sell on a rally to 4,200 or 4,300. The sectors to sell are the consumer discretionary (XLY) and financials and banks (XLF). They back test the worst during stagflation periods i.e. slowing growth and accelerating inflation.
The key takeaway is that the fundamental picture is still very bearish. However, bear market rallies can be vicious when sentiment is low and positioning is skewed to the down side.
Have a plan and execute on your levels. (And join me in Power Income trader, where the gains have been quite tasty.)
Have a great week and as always …
Live and Trade With Passion My Friend,
Griff