Option Analysis Setups: $SPY Short Covering Aided Rally, but Complex Flows Ahead
Weekly Recap:
● Last week puts covered which helped SPY rise off the major support at 390
● SPY closed above 400, which is mildly bullish, but issues ahead
● With CPI, VIX + SEP op-ex on board, we suspect traders may add new protection
● Only until we get past FOMC will the next cycle unfold
Major Market Indices & Option Flows
1: S&P 500 ETF ($SPY)
Last week markets couldn’t crack the key 390 support zone we’ve been talking about to start the shortened trading week.
Traders then kicked off the second day of trading last week covering shorts/long puts. This started a positive feedback loop of traders covering more puts while selling volatility while it was still elevated.
The resulting tailwind left SPY’s gaining in the last 3 sessions to the week, clearing the major resistance between 400-402 on the last trading day for the week.
While above this 400-402 zone, we’re mildly bullish, but…we have events coming up this week and next that leave us pause on getting overly bullish.
First we have the CPI/PPI on Wednesday which also coincides with the VIX op-ex in the am.
The latter should give markets a boost of sorts while CPI is path dependent.
Then we have on Friday the Sep op-ex with a significant amount of options rolling off. Due to last weeks closure of puts, we think some of the potential rally fuel for next week was spent last week, but we still could see more puts closed, thus providing some end of week tailwinds for equities along with some volatility.
But the following week throws a kink in this because we have the FOMC on the 21st. We think at best, the Monday after the Sep op-ex is volatile, but traders will be seeking protection for the FOMC while VIX is cheap. This should lead to compression in the PA late Monday, Tuesday and the Weds morning before the FOMC release.
Hence, with VIX coming down quite a lot, we may want to buy long vol/downside protection early this week if the market stalls on Monday.