Chop Till We Drop

UPDATE 11:24am EDT: I’m about to grab breakfast but wanted to chime in real quick:

The meat of the move is obviously done and many bears (and bulls alike most likely) are expecting a nice drop to the downside as we are in demonstrably overbought conditions. Well, that sounds all nice in theory but I can easily imagine a scenario where we just chop around for the next two days until OPEX draws to conclusion. Theta burn is the name of the game but even if you bought ITM March index options hoping to ride the consolidation down with little mini-futures (which is what options turn into when there’s no time value left) you might be out for a burning.

Anyway, maybe I’m too paranoid and we drop like a rock soon, but I wanted to throw it out there. The Zero is pretty flat right now, which always gives me pause. For the occasion I also would like to post Tom Sosnoff’s Ten Golden Rules for Expiration week – make special note of rule number 1:

1. Look for flat and range-bound markets after Wed. After a large move (usually on hump day – Wednesday), the markets go flat. Reason is that most of the churn is done at the move day. Don’t expect large back-to-back moves. Look for flat and range bound trading.
2. There tends to be a continuation of the major trend. Use pull backs for buying opportunities – use rallies for selling into it. You get buying/selling pressures into the following week. Don’t be a contrarian! If it’s bullish you should be buying dips, if it’s bearish you should be selling rallies.
3. Wed-Fri of expiration week have historically a bias to the buy side. There is an enormous amount of arbitrage going on. It happens to be one of the more bullish times of the months. Most professional traders are very flat during that time – and if for instance they have an open SPX position, it makes them very nervous to have exposure to the upside.
4. It is best to be out of your front-month positions by Wed of expiration week. If you are expecting a certain move and it hasn’t happened by Wed, you want to get whatever salvage value there’s left. Or if you’re in a good position that cost you some money, you don’t want to go into the delta/gamma risk and Wed should be your close day. Don’t get too greedy during expiration week.
5. The Monday after expiration is one of the most liquid trading days of the cycle. It is also the best day to get an option as close as possible to theoretical value, and it’s a great day to get involved if you missed establishing positions the following week. It’s one of the more intense days and everybody is at work. Traders are less at edge. It’s a wonderful day to establish new positions – as there is no front month expiration risk.
6. Stocks and options don’t lie going into expiration week. For whatever reason stocks that are strong tend to stay strong. Strong stocks stay strong, weak stocks stay weak. Usually the market is very fairly priced.
7. April tends to be a bullish month around expirations. March, which has the ‘triple witching’, tends to be a little flat. You have a triple witching cycle which is March, June, September, and December (3/6/9/12). The months following (1/4/7/10) have a historical bias to the upside.
8. Be strike-price aware! Remember that options have a tendency to go to the number that hurts the most people, which is a strike. TOS calls it pin-risk. Over time, certain stocks have a tendency to go the next strike price. Even indices have a tendencies to go to their nearest strike.
9. Close ATM positions prior to expiration. Your target spot is your at-the-money strike for at least half your positions no later than Wednesday. The expected move in the following days will take you away from your sweet-spot price. Again, don’t be greedy – we all know what happens to pigs!
10. Familiarize yourself with the 4 major futures food groups. Look at the Russel 2000, Nasdaq and the Dow – a strong index will stay strong, and a weak index will be weak. You have to watch what pushes the markets: /ES, /NQ, /YM, /ER2, SPX, NDX, VIX

UPDATE 2:14pm EDT: I have been a bit quiet in the past two hours as it’s a boring day and I am taking care of some website related chores. First up I had to add polish up our subscriber agreement – it looks much nicer now. Then I just put an order in for another server upgrade – you leeches are killing me and we already burned through 500 GB worth of bandwidth and the month is only 2/3rds over! Hey, that’s what I get for being an attention whore! 😉

I’ll continue to chime in here and there today and tomorrow but don’t expect the usual onslaught of comments – there’s not too much to talk about right now unless I have some kind of epiphany. I might post a more polished version of last night’s charts – if you missed those go here and take a look.