Post-Expiration Week Predictions for the Month's End

Plus, the sectors that performed best this past expiration week

Senior Vice President of Research
May 24, 2021 at 8:50 AM
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 “… I see the round 4,100-century mark as a critical level. Not only is this level the site of the breakout above its channel in mid-April, but with the SPX’s 50-day moving average rising about 30 points a week, it is projected to be near 4,100 by week’s end, and that lower boundary of the channel will be at 4,104 on expiration Friday... Absent a spark of some kind to get the ball rolling back to the 405-strike, it is setting up to be quiet expiration week from an options perspective, with the SPY more than 11 points above the $405 level. But with $405 being touched just three trading days ago, the delta-hedge selling scenario is a worthwhile mention.”

          - Monday Morning Outlook, May 17, 2021

Expiration week was a mirror image of the previous week, with the S&P 500 Index (SPX--4,155) hitting its low for the week on Wednesday, following early in the week selling. In fact, buyers emerged around the same levels in the past two weeks, with the SPX’s trough at 4,057 two weeks ago and last week’s low at 4,061. 

Per the excerpt above, given it was expiration week, it was of utmost importance was that the exchange-traded fund (ETF) related to the SPX, or the SPDR S&P 500 ETF Trust (SPY--414.94), held above the put-heavy 405 strike. A break below this level would have made stocks vulnerable to accelerated selling, as put sellers at the 405 strike and strike prices immediately below here may have been forced to sell more and more S&P futures to hedge. 

Instead, on the heels of a bounce from the vicinity of the previous week’s lows, those put sellers likely unwound remaining short futures positions, generating a mirror-like rally compared to last week into the 4,150 area.

Per the chart below, on a closing basis, the 50-day moving average -- the lower trendline of a channel in place since mid-November, and the round 4,100 century mark where a breakout above the upper boundary of the channel occurred in April – all acted in concert as a support zone. Additionally, the intraday low at 4,061 was just a few points above the level that marks six times the 2009 low, which I have highlighted multiple times this year. 

Looking ahead to this week, I continue to see the SPX’s 4,100 level as a critical level of potential support, as this is the lower boundary of the channel at the beginning of the week and the projected site of the 50-day moving average midweek.  Additionally, as discussed earlier, it is the level from which a breakout above the upper boundary of the channel occurred in April. By week’s end, the lower boundary of this channel is projected to be 4,126. Resistance at the beginning of the week is at the upper boundary of the channel, or the 4,245 area, which coincidentally is around the intraday highs earlier this month. 

May 21 MMO Chart 1

I would like to revisit the rally from last week’s low and what might have been at work. At its lowest intraday point last week, the SPX was roughly 100 points below the previous Friday’s close and by early afternoon on Thursday, it had gone full circle, trading back near this May 14 close. But the rally felt different from the prior week, in terms of the type of equities that were rallying. 

Therefore, using,  I captured the sectors that had performed the best during expiration week as of Thursday afternoon. In the chart, I included each sector’s performance for the month.

Per the table immediately below, ordered by best sectors from the Friday, May 14 close into the Thursday, May 20 close, it is evident that sectors that led the rally from the SPX’s trough two weeks ago were not the leaders following the expiration week low. This month’s leading sectors declined last week, while those in the red this month were last week’s leaders.

May 21 mmo chart actually 2

I took the observation above one step further. Not only did expiration week potentially impact the SPY’s behavior, but this was clearly evident after observing the price action of individual components of the SPX. 

As the SPY held above heavy put open interest strikes, the subsequent rally was likely helped along by the unwinding of some short positions related to the put open interest.  

Likewise, those stocks that were trading at or just above heavy put open interest entering expiration week were likely beneficiaries of the unwinding of short positions related to those puts. One way we quantify this is by measuring daily the front-month gamma open interest put/call ratio (front month gamma SOIR). The higher the ratio, the more the put open interest relative to call open interest in the vicinity of the underlying. The lower this ratio, the more call open interest is relative to put open interest at strikes in the vicinity of the underlying. Such stocks were the weakest, and this could have been due to an unwinding of long positions related to those calls as expiration neared.

May 21 MMO Chart 3

I think this is notable because the rotation that we saw last week (tech leadership and basic material weakness) could have been driven by option expiration mechanics – an unwinding of short positions on equities coming into the week nearer to heavy put open interest in the May series, and an unwinding of long positions on equities nearer to heavy call open interest at the start of last week.  

This is a concept worth considering as you plan for the week ahead.

May 21 MMO Chart 4

There is another theme with respect to the impact of expiration last week. Wednesday morning was the expiration and settlement of May Cboe Volatility Index (VIX— 20.15) futures options. In that regard, the pop from the VIX’s half 2021 closing high at 18.60 to start the week was rather timely in that the May futures contract, with a settlement of over 25, caused numerous VIX futures put options to expire worthless.

Per the observation that I made on Twitter, it used to be that call open interest dwarfed put open interest, and after a VIX spike in the days or weeks preceding a standard VIX futures expiration Wednesday, the VIX would sharply decrease just before expiation, and many calls would expire worthless.

So, it may be more than coincidence that the VIX peak last week was after Wednesday morning’s settlement. Also notable is the close below its 200-day moving average. But as long as the VIX remains above its half 2021 closing high at 18.60, it could be indicative of a choppy, volatile grind higher within its channel during the early summer months.

May 21 MMO Chart 5

Todd Salamone is Schaeffer's Senior V.P. of Research

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