As I wrote about in TMO last night, the option activity that stood out like a sore thumb yesterday involved the SPY Nov 140 puts. That line traded almost 350,000 times yesterday, more than double (and almost triple) the second most traded line, the Nov 139 puts. Why is that important?
First, let’s look at the price action in the SPY over the last 20 trading days (the last month):
I’ve drawn a red line at the 140.30 level in the SPY, which basically corresponds to the 1400 level in SPX cash. As you can see, it held as support throughout late October. But as often happens in financial markets, once the important level broke yesterday, price action was fast and furious (SPX cash moved to 1388 within 30 minutes before bouncing). The market spent the rest of the day trying to recover the 1400 level in SPX cash, but the heavy selling into the close resulted in a convincing break of that level.
Turning back to the SPY Nov 140 puts. Is it a coincidence that there was massive volume of that strike on a day when SPX cash finally broke 1400? Of course not. Institutional investors were scrambling for some protection as that key psychological level broke.
There are short-term, mid-term, and long-term market participants. They each make a contribution to price action. The risk in this market is that there are far more fickle, short-term participants moving prices. The fact that the top 10 most traded option lines in AAPL were all weekly options is more evidence that short-termers are dominant. In that case, 1400 in SPX cash holds even more importance.
Markets overnight:
- Asia was fully red, catching up to U.S. and European price action. Worst performing markets were Hong Kong and the Shanghai indices.
- Europe opened green, and has remained green all session. SPX futures trading around flat.
- On the central bank front, interesting that the BOE ended its most recent QE program as some members questioned its effectiveness. Perhaps the biggest risk to U.S. markets is that the Fed put may no longer exist, since they’ve already announced QE-infinity.
- Currencies and Treasuries close to flat, commodities are broadly higher, led by oil.
- Initial jobless claims at 8:30 am