The Open Interest Paradox and Next Week

Happy New Year and happy all time highs! So far 2017 has begun with a bang and the major indexes are at all time highs (or close to them). Simply put this is bullish. About a month ago I showed a study related to 52 week highs minus lows shown below. Two weeks ago here I described my concern with what the statistics showed for 15 days out (was supposed to be higher) because of the conflicting open interest (there was too much call resistance on SPY). It turns out the open interest won that fight; however with regard to the 20 days out there is no disputing that new highs were made. screen-shot-2016-12-16-at-6-04-34-pm

Below is a discussion about why I did not post open interest last week to the public and the lesson you can learn from it and then next weeks open interest.

Last weeks open interest: I know there are some people that do not read my post and instead just look at my open interest. I know that I do not bear responsibility for how those people interpret my open interest chart, but I also didn’t want to be blamed for their potential mis-understanding of the chart (or to have to answer questions all week to those that look at the picture and don’t read the analysis). For those that are interested in open interest and also learning more about interpreting it read on….

This is what SPY-Friday expiration looked like last weekend. SPY had closed at 223.53 and there was a VERY obvious pin of 220. Most people would think this is an obvious magnet (makes sense right?). Below are the reasons I did not believe SPY would pin there and lessons for you to take into the future:spyf

  1. Having monitored open interest for years I have experience seeing a very prominent pin with exceptional volume that is going against the market trend and from that experience it rarely pins (btw that prior experience meant me losing money cause I also thought it would pin there – hence the lesson stuck).
  2. The first week of January, although is not a monthly OPEX, tends to be a relatively popular date to other weeklies and thus those 220 calls and puts could have been put on a long time ago and much more meaningless at the present.
  3. The fact that the calls and puts have relatively similar amounts of volume on the 220 strike meant it was likely put on (opened or sold or part of some other strategy) by one institution and thus that institution could easily have taken them off or done what they already needed to with them.

Those were all the reasons I was leaning toward the pin not working last week (obviously I wasn’t 100%, but had a strong bias). During the week there were two things that confirmed my belief.

  1. SPY had no trouble getting over the high 224 calls, which also was probably put on by one institution considering the amount relative to all the other strikes. As long as it stayed above those calls there was no reason for me to believe it would sell off to pin at 220.
  2. This is important cause this happens even when there isn’t a prominent pin and something to take forward. The Wednesday SPY expiration shown below looked normal and thus there was no reason to believe it would not pin. However, it did not pin as SPY had the strength to get over a large amount of 226 calls to close at 226.58. Typically when that happens it is demonstrating extreme strength. In fact after the close Wednesday I wrote to my subscribers that I thought it would lead to new highs in the market (albeit I admittedly thought it would happen on Thursday and also would be met with DOW 20K). picture1

So what is the lesson? For starters, following open interest to help determine where SPY (or any momentum stock for that matter) will likely close or not close is an art not a science. This obviously goes for all technical and even fundamental tools used for trading. Second, when there is a prominent pin that sticks out in an extremely obvious way with similar massive volume on both the put and call strike (usually happens on a monthly not weekly), it likely will not pin there. And finally, if the prominent pin is going against the trend of the market, often price will move even further away from that prominent pin.

Next week Open Interest: Unfortunately I cannot give you much to go on for next week as both the Wednesday and Friday expiration have large ranges where SPY can trade between without put support or call resistance.

SPY-W: Huge range from 222 to 230 and the middle part is likely to shift at the start of the week. In this scenario there isn’t much to overthink except to know that a further rally to new highs would struggle at 230 if it got there and the opposite is true at 222. spyw

SPY-F: Again not much to glean from the chart below as there are not any prominent strikes minus the 230 strike and everything below there is likely to have shifts during the week. spyf

In sum, except for a quick lesson on SPY pinning for the future there isn’t much information I can give you related to SPY. It is at all time highs and there currently is no signal of a reversal at hand (yes that could change in just one day – but it’s not there yet). For those interested in learning more about open interest and how to use it to trade momentum stocks as well as SPY consider joining SassyOptions where you will receive intra-day market analysis and real-time option trade alerts. Some preparation and luck led us to taking AMGN from $0.41 to $5.20 and GOOGL from $0.17 to $3.70. Not to be deceiving please understand that options always involves losses, but big winners like that make up for them plus some.

Good luck!