Option Investor
Market Updates

A triple-witch rally

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Stocks continue to build gains as the Dow Industrials climbs back to the 8,500 level, while the S&P 500 Index (SPX.X) nears the 900 strike, which held the bulk of open interest for both the 900 put/calls on what looks to be an option expiration rally.

One reason I think this is today's sharp drop in the Market Volatility Index (VIX.X) 31.77 -8.04%, which hints that put traders holding positions into today's stock expiration started unraveling those bearish positions on the gap higher and as stocks trending higher from the 10:00 AM hour, further selling of put positions to protect gains or prevent potential erosion to the strike of the option has spurred bullishness.

While the Dow Industrials, S&P 500, S&P 100 post gains of 1.4% or better, the more volatile NASDAQ-100 and QQQ trade higher by "just" 1.1%. Here to, the action has me thinking today's bullishness in stocks is greatly attributed to option expiration. The QQQ's option contracts expire at today's end, and I had made not in our Index Trader Wraps at OptionInvestor.com that the largest December open interest remaining was in the Dec. $25 puts and that this was the level most likely to find support, as the bulk of options that were out of the money and looked to expire worthless were in the $26 call strike as higher, thus my thinking that $25 held support, but not much of an unraveling of options would have taken place here today.

The smaller cap Russell 2000 Index (RUT.X) 386.02 +0.68% also lags today's moves and perhaps lends credence that today's bullishness in the Dow, SPX and OEX, which have the larger caps more likely to see heavier option interest, has the smaller caps of the Russell, with less option action, seeing about half of the percentage gains as the larger-caps.

I'm also watching the Semiconductor Index (SOX.X) 300 +1% trade a session high of 305, but now start pulling into the psychological 300 level. While the index options expired yesterday, there were undoubtedly many index trades "hedged against" on individual stocks in the group like Intel (NASDAQ:INTC) $17.11 +0.7% and Applied Materials (NASDAQ:AMAT) $13.41 -0.88%, which suspiciously trade percentage wise just the inverse of each other and perhaps depict a SOX index at 300.

Just past the mid-point of the session, NYSE volume has just breached the 1 billion share mark, while NASDAQ volume is approaching the 1 billion mark at 993,907.

Breadth on the NYSE is positive with advancers leading decliners by a 2 to 1 margin, while NASDAQ breadth is positive, but to a lesser extent with advancers outnumber decliners by an 8 to 7 margin.

New highs versus new lows is positive at the NYSE, with 43 stocks hitting new 52-week highs versus 36 trading new lows, while this breadth indicator is negative at the NASDAQ with 37 stocks at new highs versus 46 stocks at new lows.

Jeff Bailey

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