Saturday, January 21, 2006


Marketz & Strategies : QQQQ Jan to Feb options roll-over

QQQQs and SPX closed very close to the maximum pain points pointed out earlier. So to ignore options analysis is to do so at one's own peril. (more on the interpretation on max-pain curves later).

On the other hand, I also see a rush to blame the whole market decline on volatility related to options expiration. I mean, that was some serious distribution we saw there. Markets were down big on very heavy volume. QQQQ volume of 189 million shares (not including after-hours) was more than double average volume (~90 million shares). SMH (~32 million shares Friday) was also double average volume (~16 million shares). NYSE approached 3 billion shares in trading volume.

Feb open interest as a result of Friday transactions will be known only Monday after market open. But some guesses can be made by looking at the volume. Lets do some crude math here. Assuming all calls and puts on Friday were initiated on the buy side (somewhat unlikely-but great simplifier) and not taking into acount the same options being bought and sold again, we saw a lot more puts than calls. Now options close to the money are delta-hedged by market makers by buying/selling an offsetting position in the common.

So, restricting this analysis to the 41 and 42 strikes (most likely to be delta-hedged), there turn out to be 140,000 more puts than calls. Thats 14 million shares. Nowhere close to accounting for the 100 million extra shares.

Lets turn some of those assumptions on their head. Suppose, every one of those calls were due to premium selling and all the puts were due to premium buying, then even that unlikely scenario would account for about 40 million shares. Of course, there also options on the NDX that affect the QQQQs which I have neglected.

Bottomline : Options related activity may have contributed to the market decline but very unlikely to be the whole explanation. We did see distribution. The good news for active traders is that the heavy options interest in the Feb series is likely to result in market volatility remaining elevated for a while.

Technorati Tags :

Comments: Post a Comment

<< Home
Disclaimer: This site may include market analysis. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.

This page is powered by Blogger. Isn't yours?