Another day and another new all time high for the Dow Jones as well as 12 year highs for the NASDAQ and a new 5 year high for the S&P500. Today was the tightest range day in SPX of the year, and tightest overall since August 17th of last year. Tight range signals low volatility, and low volatility at a 5 year high is a good sign in my opinion. I believe the stage is still set for SPX to make a move to all time highs and I wouldn’t be surprised if that move starts in earnest tomorrow.
What I found interesting today was the action in the weekly option pits on SPY, particularly on the call side. Peak open call interest resides at the 156 strike which saw 36,000 contracts trade today. Next highest open interest is the 155 strike which saw the highest call volume today of 42,000 contracts. The fact that both of these strikes are out of the money leads me to believe traders are betting on a big move. While I can’t tell how many of the contracts were bought to open vs sold to open (i.e. shorted), based on the overall trend of the market recently I assume they were bought to open.
Hints of a big move also show up on the put side as well, as the most active strike was the 154 put that saw over 50,000 contracts trade. While the 154 strike doesn’t have the most open interest on the put side, it does have the most of any strike within 1% of SPY’s current price. Again, this is clear evidence to me the market is expecting a big move to end the week.
What’s the bottom line? I am trusting the first direction displayed at the open Friday. That means if I see the market open up and leg lower right away, I’m inclined to short any pops higher and use the opening price as a stop loss. Same goes for the long side, if the market pops higher right at open then I’ll look to go long the first pullback using the opening price as a stop loss. In the (likely) event of a gap, I want to see the market stay within $0.10-$0.15 of its opening price otherwise I will expect the gap to fill in whichever direction it is going.
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