Wednesday, April 15, 2009

The Option Expiration Equilibirum Price Attractors

As we head into option expiration on Friday, it is interesting to observe what the implied "attraction" price for certain underlying securities is. For this particular example I have picked the (in) famous SPY. Calculating the put/call equilibrium, indicates that the local minimum for the SPY is at $80, compared with a recent print of the SPY itself around $84. The "equilibrium" price is the point at which the call and put payoffs are the smallest, or net each other out the most.

While there is no direct causal relationship, trading desks and other prolific index hedgers, which may be underwater on option contracts if the SPY (and S&P500 by implication) closes at current levels around 84, may find an incentive to sell indices into trading action over the next today days, thus minimizing the expiration payout pain.

The first chart below demonstrates the SPY local minimum, while the second chart is a comparison of the change in the underlying price compared to the change in the implied equilibrium price based on option trading action.

hat tip Tim Sphere: Related Content
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Anonymous said...

can some exlpian why banks continue to go up ... AXp chargeoffs spike stock up $1.20...the fed does have the authority under its exemption rule to buy used cars if it so chooses. IF they can;t get money through Congress and they know it, why wouldn't the fed start buying equity into the stress tests push up the stock prices then lean on the likes of BAC etc to go to market hat in hand. Better at 10 then 3 or 4..

Anonymous said...

right click -->Open in New Window, Rally Monkey

Anonymous said...

Black box buy programs came in right @ 3pm.

Look @ the 3pm volume on IYR (GS going long and short the srs??)

Can Bob Pasanti please just go into a corner and fist himself.

Anonymous said...

Yea, look at the volume on the close 3:40pm - 4:05. Looks like a huge liquidity problem.

I think the deltas are selling to the betas while similtaneously arbing with the omegas. Which as we all know is a big no-no!

Anonymous said...

I'll keep repeating guys simply crack me up. The market is going to do what it has to do...and not what you WANT it to do.

Anonymous said...

Thats right brother. The Clueless Bear ratio is at an all time high, thus the index levitation.

Shorts giving back some of those easy money gains they made during the Apocalypse.

Max Pain is old news and as far as I can tell, doesn't work.

HazeNYC said...

Gamma gets enormous around expiration front month options, so there is a natural tendency for options to pin strikes with large open interests.
Looking at open interest is a good indicator of where a stock my close if it pins a strike.
(i.e. if is trading 18.80 and the 19 strike has 1/2 million contracts- both calls and puts - open interest) there is a huge tendence for those long options to buy shares below 19.00 and sell shares above 19.00 (while those short options tend to not to negative-scalp themselves and do nothing).

Anonymous said...

Hey TD,

You obviously track the SPY, so maybe you can tell me what is up with those "bad ticks" that show up from time to time (actually quite frequently) and seem to then exert an attraction on price in the relatively near future.

A perfect example is today around 10 minutes before the close, there's a bar on my chart that says we traded down to 84.25 on the SPY, but clearly we didn't.

The most significant example I've ever seen was on Feb 5th of this year, when there was a bad tick that said we traded at 77.73, when the intraday range was between 82 and 85ish. Sure enough, after a couple of days moving up we eventually hit that 77.73, and, of course, kept going. I got short based on that bad tick alone and made a killing. Not the most sophisticated chart analysis, but from my experience, these things are nearly always predictive of where the market wants to go and I'm definitely not a tape-fighter, so I could care less where it goes, so long as it doesn't stand still.

TD? Anyone?

Anonymous said...

Can someone please explain in plain english what the hell happened in the last half hour of trading? Is market memory so short that they forgot the decline in industrial prod, very mixed beige book, bad real estate numbers and mixed credit charge-offs -- all of which came out just a few hours earlier? I'm not asking for someone to explain why the rally was rational, just why it happened.

btw, did anyone else catch it when Erin said to john harwood: "I hear you got teabagged"?

Anonymous said...

@ 4:29 PM

You must use TOS as your trading platform. Trade them as Hints, and don't say another word. K?

Anonymous said...

LMAO, Love the monkey!

Anonymous said...

Of course you got short on that bad tick. Web's full of stories like that told by genii.

I remember sitting in the park one day, and a bad tick landed on my arm.

Next day I went long Raid(c) and made a killing.

Anonymous said...

Those were just me covering my shorts.

Anonymous said...

@ 4:29 PM

If you're real sharp, sniff your traffic using Wireshark and you will find all sorts of goodies.

Anonymous said...

The market is currently making sure that anyone using logic gets their butts whooped.

What else do you need to know.

I personally felt there were way too many eotw types around, writing blogs, talking trash.

Anonymous said...

its just a buy program people, relax.

Anonymous said...

Anonymous @4:35

Ixnay on the adbay icktay.


Anonymous @4:37

Hey, believe what you want. No skin off my back.

Anonymous said...

TD, T2, Corney, and Rolexman:

t2 said...

that's some funny shit 4:54

me prefers the stone roses version tho.

Now youre at the wheel
Tell me how, how does it feel?
So good to have equalised
To lift up the lids of your eyes

As the mile they disappear
See land begin to clear
Free from the filth and the scum
This american satelites won

Anonymous said...

@ 4:38 PM

'If you're real sharp, sniff your traffic using Wireshark and you will find all sorts of goodies.'

Care to elaborate? This sounds interesting. Thanks.