This options expiry week is turning out to be a lot more interesting th
an March.
The sell-off in late February and early March meant that the rebound from the heavy oversold sections was expected by the Options Market Makers. As a result market makers writing calls were delta-hedging and enjoying the volatility (Vega) and time (Theta) decay.
During this options expiration cycle, the market has continued to move higher against the wisdom of many market participants who have been calling
this a bear market rally which has come up too soon
too fast.
As a result the options market makers may have taken more delta risks than the previous cycle, and may have been delta negative coming into this week. Wednesday and Thursday saw two big intra-day rallies. Wednesday’s rally continued as a Gap-Up Thursday open.
Thursday’s rally gave back some gains at the end as SPX reached the 870 point.
There is a strong chance that these two rallies were driven by institutions who had written calls, buying to cover their negative deltas.
The SPX Index Options settle at the opening print tomorrow. Given the gaps we have seen, there is strong chance that most traders hedged any outstanding risk, adding fuel to the upward moves.
I do not expect the SPX to convincingly break through and close above the 875 resistance level on options expiry day; there are typically too many counter-currents in play this day
to see a convincing move through such a major market resistance level.
The market was this week by the most beaten down (and shorted sectors): Financials (XLF), HomeBuilders (XHB) and Commercial Real Estate (IYR), with the price being chased up.
It suggests that the rally was again driven by shorts (pure equity, call writers, put buyers) closing their positions.
As a result next week will be the week to w
atch to see where this market goes.
A small pull-back is expected.
What happens after that is up in the air, and might as well decide whether we see a 940 print before we see a 740 print.