Friday, 16 October 2015

Is OpEx leading to something bigger?

Over the past few days I've kept hearing the word OpEx coming through on traders timelines and wondered what they meant by it. Initially I thought they were talking about operating expenditure in the context of financial reporting statement due to the fact that earnings season was in full swing , but no it wasn't that.

I decided to investigate on Investopedia and found this article that cleared up everything. OpEx is a short abbreviation for Options Expiration, the date on which options terms come to an end and this occurs on every third Friday of the month every month. Usually when this period comes around there is an uptick in volatility which is why so many traders pay attention to it.
 Knowing this it would be good to assess the statistical analysis around the date and determine what influence it has in stocks. Ryan Detrick does a great job in unpacking the data with this table below just one of his findings. He has summarized the daily performance that occurred on each Friday of the month that options expired.

Firstly judging by the the observations it's quite obvious to see that there had been a very strong period in the first 6 months of the last year then followed by weak set of numbers. It's evident from the last 2 observations that volatility has markedly picked on not only on the negative returns generate but also on the measure of drop with both recording the worst returns out of the negative returns.

So what we dealing with here is a potential for a volatile day with bias to the downside. We did see a late session rally in US stocks yesterday with the most probably action of option holders closing out positions as the cause of the rally. It's because of the fact that so much optionality remains open and needs to be closed that things become very uncertain and difficult to trade so caution is advised.
Another view that's been out there that I find interesting was from Northman Trader, where he has charted the daily year to date of the S&P 500 and highlighted that every OpEx rally that has materialized as a result of closing out has ended up being a signal to short the market. With this evidence at hand it's yet another nail in the coffin of the bulls in the short term.

It's going to be interesting to see how things pan out but I have a feeling that after a short bounce after a sudden drop, the sellers may use this opportunity to add further exposure to their existing short positions that will eventually take the market lower.


 I think if you're looking for the most bearish view out there on the market you have to turn to the guys at Zero Hedge. They wrote this piece that ties so well into what I've been discussing today. I did hear a few mentions of the Skew Index, a ratio between the price of out the money puts to and out the money calls with levels of extreme registering at 100 and 150 with the former being the least fearful and 150 the most fearful of a black swan event. It can also be indicative of the degree of insurance institutional investors have in case armageddon occurs.

The article highlights the a significant divergence between the Skew Index and the VIX, a measure of volatility most known to market participants. They believe that with levels of the VIX sinking into the depths of the abyss many retail investor might be sold into the notion that there is nothing to worry about in the markets with the belief that indices should go on to all time highs again. However the Skew index would suggest that institutional investors think the complete opposite and with their sheer power to move the market leaving no second guesses where market could be heading to.  
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