What happened on last Friday?

The last Friday, $QQQ jumped beefy 2.91% and led the market. There was no doubt that the earnings from $AMZN and $GOOG fueled the NASDAQ composite index.

In this article, I would like to leave some comments from option market perspective. First, let's see the Open Interest chart from our #optionM8 app.

QQQ OI 171103

As you can see, there are HUGE SHORT positions at 150C.

If you check the 5min chart of QQQ 171103 150C, you will find that someone sold 34000 of 150C at $1.24 between 10:45 and 10:50 on this day. That is $4.2M of bet for QQQ closing below 150 on next Friday.

Coincidentally, QQQ started surging immediately after this 150C was sold to open. One can argue that this call seller was forced to buy cash QQQ for delta hedging. If this were the case, we could ignore this 150C open interest, however, if this seller has big balls, QQQ would pull back to 150 or less by next Friday so that the 150C seller could pocket $4.2M of premium.

Remember. Selling CALLs is highly risky business, unless it's hedged, or, ... the seller would know something we don't know. I won't get surprised if I see QQQ would pull back to 150 level by next Friday.

There was one more interesting thing on last Friday. RSP, equal weighted version of SPY, ended flat and negative on weekly chart.

RSP Daily

RSP Weekly

What do those chart mean? They mean less stocks are pushing up SPY. The momentum is definitely weakening.

The next chart is SPY:RSP ratio. I added B-Band to see how the last Friday was unusual.

SPY:RSP Ratio daily

This ratio has strong mean reversion and usually ends up inside of B-Band, however, this ratio rallied on Friday and ended up ABOVE the B-Band. I scanned past five years of data but I couldn't find similar case.

If we can expect mean reversion for SPY:RSP, we would see QQQ's pullback this Monday or Tuesday. Since much of SPY's advance last Friday was accounted by QQQ, we could expect SPY's pullback as well.

SPY OI 1101

SPY OI 1103

For the OI Wednesday, it's pretty much biased to PUT long side. It usually works as support, since those long put holders would close their position before expiration. (When many puts were sold, the stock price tends to rise.)

The problem is in 1103 OI. There are HUGE 257C LONGs as well 257P SHORTs. Those 257C longs would start closing their position once SPY starts pull back. When many calls are sold, the stock price tends to decline.

SPY 1103 257P 5min

Then I would like to point out that somebody SOLD 10000 of 1103 257P at $0.73 last Friday between 12:00 and 12:05. SPY 1103 257P closed 0.67 last Friday and it's OTM for now.

If SPY breakdown 257 and SPY 1103 257P moves above $0.73, which is not so far away, the seller of 257P would start selling cash SPY or buying back 257P, ether of those options creates down pressure on SPY.

The good news is that there are lots of 256P Longs floating and they would close their position once there 256P rises back above VWAP. We would find relatively strong support between 255 and 256 next week.

Happy Trading.

SPY Option Market Analysis 20170111

Wrap up for today

Yesterday I wrote

Most of those 226P was bought today at 0.2 level, ant VWAP is around 0.4.  Those 226P holders may hold the position even after the price exceeds VWAP, because puts are too cheap now. Do you set stop-sell for lottery ticket? I don't.

SPY 0111 226P 5min

Indeed, SPY was sold as Trump talked at conference, and the VWAP 0.40 worked as resistance, and I thought the third attempt would break the VWAP. I was wrong.

SPY 0111 226P 5min after Trump

The breakout was fake and I lost my bet. I should have stayed at my discipline. Don't be too greedy.

Tomorrow and beyond

SPY 0113 OI

The price based OI (3rd row) for Friday looks slightly bullish. 228.5C would become as resistant level.

OptionM 8 new version

OptionM8 new version

We released a new version of OptionM8. 

• Android version
• IOS version 

In this version, we made it possible to display value-based OI. We also made it possible to display VWAP (volume load moving average) on option price chart(daily, 60 minutes, 5 minutes and 1 minute). These functions are unique to OptionM8.

Based on the value-based OI, you can estimate whether a certain strike is Net Long or Net Short, and how much their positions are.

Also, by looking at the VWAP of the daily options chart, you can see how much profits/loss are on the long side or short side.

If a net-short strike enters ITM, those sellers would be in red and they are likely to buy back those  options. In other words, the probability of option price rise increases.

Tap Open Interest from the lower screen menu
Select Ticker and Expiry from the top right menu 
→ Open Interest charts are displayed 

The Value-based OI is in the 3rd row.
Calls are green and Puts are red.
You can see 221.5 Call and 222 Call are net short

Select Daily Chart from the bottom menu
Then select Ticker, Expiry, Call/Put, and Strike Price from the top-right menu
→ The Daily charts are displayed

The second row is the Call's daily chart
The red line is Bid-based VWAP and the red line is Ask-based VWAP
As you can see, Calls are way above the VWAP and shorts are in loss,
therefore you could expect those calls are "buy" in the intraday dip.

Conversely if the net long Strike is in OTM and those longs are in red, they have a high probability of "sell the blip" somewhere near VWAP. If it is Call, that strike price would be a strong resistance of stock price, and if it is Put, that strike price would work as strong support of stock price.

Select OI from the bottom menu then select Ticker and Expiry
from the upper menu of the screen to display OI charts

The 3rd row is the value-based OI chart.
You can see that 219 Put is significantly long.

Let's see how the 210 Put is working...

As you can see, that 219 Put is below VWAP and longs are in loss.
If SPY drops to 219 level, you could expect strong "buy" opportunity.

The pricing OptionM8 is as follows:

• Guest users can display OI charts, daily charts, and intraday charts for SPY only one expiration and one strike. Guest users would see advertisements.
• Guest users can upgrade to Free tier by logging in though Twitter. Free tier users can display OI charts, daily charts, and intraday charts for SPY, QQQ, and IWM with next two expirations and three strikes. Advertisements would be displayed.
• Free tier users can upgrade to Basic tier by subscription. The price is $49.99/month. Basic users can display those charts with more expirations and strikes.