Last week here I summed things up with:
In sum: The market strength on Friday is likely to lead to new highs being made; however be aware at the limitations the current breakout has in the near term. Should SPX fall before making a higher high next week, technical support levels will likely be quickly bought. If on the other hand the week begins strong and the open interest doesn’t shift, be aware of a pause and likely pullback as the week progresses. Below 217, should raise many caution flags.
What happened, what’s to come: There was a new high and then the latter scenario took place when the market began with strength. That then led to a pause and a slight pullback, if you can even call it that. There isn’t much new to share that I didn’t write the last two weeks so see here if you missed it. With that being said I will go straight to the open interest.
SPY Open Interest: Below are two different graphs. The first one shows the 220 strike and the second one has a narrower range in order to leave out the 220 strike. As you can see, when the 220 strike is visible it dominates everything else. Hence, price is likely to struggle to get over 220 if the market continues to rise next week. If however, it does get over 220, it is very likely to fall back and either close on or below it by the end of the week. The second graph that leaves out the 220 calls shows that pretty much every strike has a decent amount of open interest. The predominant calls are 215 through 219 with 217 being the second highest to the 220’s. The puts predominantly start at 215 all the way down with the highest strike in the vicinity being at 210.
Staying over 217 (where the breakout started after the jobs number was released) keeps 220 on the table. Below 217, if the market is continuing a very low volume choppy environment with relatively flat intra-day breadth (advance/decline, up/down volume, TICKS) then the range will likely be roughly 215 to 217. Below 217, with a trending down day (again watch internals) delta hedging could lead to a swift fall toward 212 or 210. That was likely part of the reason for the large downfall last August OPEX. With that being said, keep in mind that the statistic about August being a volatile month (I even posted about it the last couple weeks) is now widely known. Furthermore, many people are aware of what happened last year in August and thus there might be some type of anticipation or fear putting traders on defense. Of course this is anecdotal, but it would be rare for a similar thing to happen with traders heightened awareness of its possibility. Bottom line though, know what the heavy strikes and delta hedging could bring.
In Sum, the market is still meandering about at the highs and could potentially shoot up to 220 which would be heavy resistance. If SPY remains over 217 it would be hard to make a bearish case in the short term. Under 217, with a slow and choppy market roughly 215 would hold as support. Under 217 with a trending down day and delta hedging could lead to some more intense bull pain.
Learning more about open interest:
Friday I posted information on twitter of the higher momentum stocks that I follow open interest on. It is an example of how open interest can be useful for short term momentum traders. Nothing is full-proof, but knowing which stocks likely have heavy call resistance or put support does help immensely. Below are some examples from last week if you missed my posts on twitter. If you want to learn more read here. Also, if you want to see how it can be implemented in your trading system in real time consider subscribing to SassyOptions.
Knowing where stocks will likely have a hard time staying above or even knowing where they will likely pin can really enhance your trading success. Last week we were able to avoid getting chopped up chasing stocks that looked good, but had many calls stacked up, i.e.: GOOGL (knowing about the 810 calls resistance) or AMZN (775 resistance) or FB (225/226 resistance). However, we were able to profit from AAPL and NFLX, both of which we could trade with the knowledge of how far they could likely go. There are times when stocks move past high calls or puts and signs to look for to figure out when that might be the case. Reading open interest is more of an art than a science and in order to truly understand it, you need to track it daily something I do at SassyOptions premium.