Options Expiration Strategy: Street Sense

Price Headley, founder of BigTrends.com, is hosting an options "tradecast" Tuesday at 9 p.m. EST (Aug. 18). Click on this link to take part.

This week brings us options expiration, and with it the lowest volatility we've had in about a year. We could argue complacency, and that would certainly make sense. We could argue bear market rally, and historically speaking that could be correct.

However, given the power of this move, we've talked about for weeks now, there seems to be no let-up. Expiration week is a time mostly for closing positions, but we play it in a way to find the short-term momentum trends up or down and ride them out. This week may be particularly exciting from the standpoint of several big earnnings reports and economic reports.

Option Open Interest Seems to Be Telling Us Something

One thing that grabs me during expiration is open interest. While far from perfect indicator, the open interest is a characteristic of supply and demand and is usually a good clue into where prices are heading in the short term.

Basically, what we look for is price gravitating toward the largest open interest but not drifting over to "in the money" status. This tends to cause the greatest amount of pain between buyers and sellers. The best indicator I've found is looking at the skew of open interest in the SPY and QQQQ. There is a heavy open interest concentrated at specific strikes (QQQQ 38 put and SPY 100 call/put). I would say based on this fact the bias is probably for a slightly lower expiration week overall.

Shhh... Listen ... Hear that Sound? Bears Are Grumbling

Let's be honest, the bears have been drilled since early March, a 50% move mostly uninterrupted. That's five months of pain and nary a chance to make a statement. The longer we go without some major downside the less likely it'll happen as they expect it to.