Hey There Income Hunters,

Market cycles can ignite very powerful trends, and the monthly options expiry cycle has consistently reversed those trends.

Why?

Because, monthly OpEx wipes out all the option open interest that had built up over the previous month. 

So, over a couple of days, market makers, who took the other side of those option trades, must close their stock hedges. 

The March/April cycle has obviously built up massive call open interest, which means the market makers are net short calls and long stock …

So, we will see large selling of stock between Thursday and Monday.

Now the question is will we see a reversal similar to the February cycle that caused a 7% decline?

April Open Interest Imbalance

Notice in the graph below how much larger the call deltas are versus put deltas that are expiring on Friday.  This results in market makers needing to sell stock that hedged the short call positions that built up throughout the month. 

The Jan./Feb. cycle put the market makers in a similar position into the Feb. 17 expiration …

Sure enough, as you can see below, the market reversed at expiration and continued down 7%+ into mid-March. 

The critical question is … Will this monthly cycle be any different?

I think it can be because of how important the Fed meeting is on May-3, when the Fed will likely hike another .25% but may signal a pause …

Now, let’s be real, the banks have a pretty good idea and their goal is to get you offsides so they can make all the money. 

They have no problem losing a little to make a lot. So, I believe the most likely scenario is this: 

We do see a 1-2% decline post OpEx and consensus builds that the Fed will hike .25% and remain hawkish. 

Instead, Powell does hike the .25% but hints of a pause igniting a massive squeeze higher that breaks out to the upside.

I say this knowing how banks work … They do not let an opportunity go by when they smell blood. 

Check out the net position report below showing stocks and bonds to be vulnerable to a squeeze. 

There are large shorts in SPX, US 10-year bonds and the dollar … Plus there is a ton of cash on the sidelines AND we are at an inflexion point in Fed policy … 

Of Course I could be wrong but the probabilities favor the pain trade, which is higher not lower.

What’s the Trade?

I will play the market from the short-side into next week looking for a 2 – 3% down trade post OpEx …

Then I would look to get long the indices with a stop loss below 4000. 

Maybe this time won’t be different and it’s back to the bear market but that just seems to be too obvious and banks love the pain trade …

Live and Trade With Passion My Friend,

Griff