Option Investor
Index Wrap

A vessel without its captain

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The major indices drifted higher, at times almost aimlessly, but for the most part bobbed between Wednesday's highs and yesterday's lows in a choppy session.

Market participants won't know just what damage Tropical Storm Ivan, as it is now called, caused after the eye of Hurricane Ivan hit the gulf shores of Alabama late yesterday and now heads inland. However, television shots certainly showed Ivan packed a punch.

So strong a punch did Ivan deliver that deepwater driller Transocean Inc. (NYSE:RIG) $33.35 +1.52% said it was searching not for oil, but its deepwater sumisubmersible Deepwater Nautilus in the aftermath of Hurricane Ivan. All personnel had previously been evacuated from the missing rig, which was moored to the seafloor with anchors approximately 160 miles south of Mobil, Alabama.

Today's release of September consumer prices, which rose a tepid 0.1% as well as a weaker than forecasted September Philly Fed report drew little response from stocks, but the dollar weakened while Treasuries surged with the benchmark 10-year bond closing at a 4-month high, with the 10-year yield ($TNX.X) plunging 10.1 basis points to 4.069%.

U.S. Market Watch - 09/16/04 (52-week % change)

The major 5, 10 and 30-year Treasury Yields dropped sharply in today's session, and with Fed funds futures still predicting a 100% chance of a Fed tightening of 25 basis points next week, bond traders seem to be responding more to "inflation" or lack- thereof data, and not necessarily trying to predict what the Fed is going to be doing on Tuesday.

Sniffffff..... I also smell some massive short covering and capitulation from "inflation hawks" dating back to May.

Did you refinance a mortgage this spring? Buy a new house? Give your friendly mortgage banker a call and see if it might be worth cost effective to refinance.

Market Snapshot / Internals - 09/16/04 Close

Volumes weren't anemic, but they weren't that robust for a quarterly index expiration. By my account, average daily volume for the month of September has been 1.19 billion shares at the NYSE, and NASDAQ's been running closer to 1.45 billion per day. June's volume, perhaps more comparable to September, also a quarterly expiration begins to have looked euphoric when the NYSE turned 1.3 billion shares per day on average, while NASDAQ was running around 1.58 billion.

One thing we may want to take a note on was how strong the A/D lines were today, but index gains somewhat fractional. The note would be how the TRIN, which is measuring up/down volume stayed above 1.0 despite the strong A/D breadth, strongly suggesting one of those "light volume" rallies that bears will say lacks conviction.

Pivot Matrix - 09/16/04 Close

DIA and QQQ as well as stock options settle on tomorrow's close and while the QQQ was trading $35.25 at 04:00 PM EDT, a pop in volume had them gaining a suspicious 7 cents by the close, to finish up 7 cents.

A tricky day tomorrow.

But, I've had several questions from traders regarding HL Camp & Company's thoughts on "The Expiring Option Exercise Manipulation Game," which they discuss at their website (http://www.programtrading.com).

Their theory (based on observation) is centered around the OEX. I won't say its complicated, but you really need to read it, as it is interesting, educational, and will instill the thought of just why we can expect some weird, or unexpected gyrations ahead of an option expiration.

I brief, the theory is that institutional traders (even large speculators) will start buying a few thousand IN THE MONEY calls on the OEX and/or SPX at around 03:20 PM EDT on a Thursday, with (I can't stop chuckling to myself) HL Camp noting that it helps if the "spoos" are dropping so you can slowly pick them up real cheap. HL Camp's records show this happens about 75% of the time.

Today's action certainly looks suspicious. Doesn't it?

S&P 100 Index (OEX.X) Chart - 10-minute intervals

I placed my QCharts' cursor tracker on the 10-minute interval from 03:10 to 03:20 PM EDT. Hmmmm..... pulled right back didn't it?

HL Camp & Company then gives greater detail, but the essence of the manipulation game is that once a trader has his/her calls, he then comes in and starts hammering the big guns of the OEX (the most heavily weighted stocks) with buy orders. Taking offers with size on GE, XOM, PFE, C, WMT, AIG, BAC and gets a little move higher going.

Then the trader waits. About 6 or 7 minutes for the ripple effect of buying takes hold. (Hmmmm.... OEX did move higher from the QCharts' WEEKLY S1).

Interesting, as what I made note of in the QQQ, is HL Camp saying often times, day trade shorts will start to panic near the close as stocks move higher, and they come in and start covering to the bell, where shorts "almost always panic with "at the market orders."

Oh... but traders aren't done yet according to HL Camp.

After the move higher to the close takes hold, a trader will buy a few thousand (remember we're talking large speculators and institutions) IN THE MONEY PUTS, which should closely match the dollar amount of stocks like GE, XOM, PFE, C, WMT, AIG, BAC the trader had bought.

Then, at 04:16 PM EDT, further manipulation takes place as traders call the clearing firms and traders EXERCISE their CALLS that night, thereby locking in profits on the calls that were bought.

Now here's where I mark tomorrow's DAILY S2 for the OEX, and QQQ traders might want to take some notes here.

On the Friday morning, just after the open, traders will often start selling all of the STOCKS they bought Thursday afternoon, where this selling can start some "panic dumping" as other traders start selling bids and bears come in and start shorting with no bids in sight. HL Camp's observations say this can have the OEX falling about 2 points (THAT's ABOUT HOW FAR IT IS TO TOMORROW'S DAILY S2 for the OEX).

You're still not done!

Don't forget those PUTS traders bought. As the OEX drops 2- points (perhaps DAILY S2) its ca-chingo time for those IN THE MONEY PUTS.

If you've never believed that option expiration can be somewhat manipulative, then HL Camp's "The Expiring Option Exercise Manipulation Game," may be something to be cognizant of.

I (Jeff Bailey) have NEVER used, nor monitored this until several subscribers asked me about it, as they saw it.

The one trade I kind of like for tomorrow is to look for an opening pop in the QQQ, then look to day trade short the UNDERLYING QQQ, using the correlative QQQ $33.50-$33.55 as resistance.

Jeff Bailey

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