What to Expect Heading Into June Expiration Week

SPX levels to watch if a more convincing breakout occurs this week

Senior Vice President of Research
Jun 14, 2021 at 9:14 AM
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Since May 13, all SPX closes have been contained inside the channel I have included in this commentary. This might be considered a win for the bulls, though… note that the SPX failed to take out this year’s early May closing high of 4,233 last week, which is another level to tune into.”

          - Monday Morning Outlook, June 7, 2021

Though there was a bit of a change last week, the spirit of my observations is in play as we enter standard June expiration week. That is, the S&P 500 Index’s (SPX - 4,247.44) early May, all-time closing high of 4,232.60 remains important in the short term. After struggling to overtake this level early last week, Thursday and Friday’s trading sessions established a new record closing high. But Friday’s intraday low was back below 4,232.60, implying these closes are hardly convincing breakouts, even though the heat seems to have been turned higher on bearish market participants.

If a more convincing breakout occurs this week, the next thing to watch is the upper boundary of the channel displayed in the chart below, which was just above the round 4,300 century mark at 4,323 on Friday. For what it is worth, the 4,296 level is a round 20% above the October 2020 all-time closing high. For those that bought the November breakout above the October high, which occurred when positive headlines surfaced on Covid-19 vaccines, the 4,300 area may prove important from a profit-taking vantage point at a round number percentage above a former high. Finally, and coincidentally, 4,300 on the SPX is the median Wall Street strategist year-end target for the SPX.

If sellers emerge and push the SPX back below the May closing high, potential support is between 4,170 and 4,190, or the lower boundary of the channel in place since November, plus the vicinity of the SPX’s 50-day moving average.

MMO 612 1

With respect to the SPDR S&P 500 ETF Trust (SPY - 424.31) open interest configuration, the big call open interest at the 425-strike – which is equivalent to SPX 4,250 – stands out to me. Most of these calls were bought-to-open, implying that if the SPY remains below the 425-strike into Friday, there will be selling of S&P futures related to this call open interest, generating expiration-related headwinds for stocks. A less likely scenario would involve delta-hedge buying that produces larger-than-normal immediate tailwinds. However, there is not much call open interest at strikes above 425 that could act as magnets, putting the SPX at risk of a swift move back toward the strike after an initial burst through it.

Per the second open interest graph below, the least probable scenario is delta-hedge selling in the week ahead, as the biggest put open interest strikes – where there is not a huge number of call contracts – does not come into play until the 390 strike, which is roughly 8% below.

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“...option speculators recently reached a level of cautiousness or pessimism on components of the Nasdaq-100 index (NDX--13,686.51) going back more than a year…the ratio of put buying (a bearish speculative wager or a hedge to protect a long position) to call buying (a speculative bullish bet or short position hedge) was in the upper boundary of this 2-1/2-year period before rolling over. The roll-over in this ratio from high levels has historically been bullish, suggesting that pessimism on this group may have hit a climactic high. Therefore, odds have improved that this group could regain its leadership role after disappointing investors for most of this year...  technical challenges remain for the index. First and foremost, the 14,000-millennium barrier must be overcome, which stopped the index dead in its tracks in April.”

          - Monday Morning Outlook, June 1, 2021

Since I made these comments at the beginning of the month, the Nasdaq-100 Index (NDX – 13,998.30) has rallied nearly 300 points, or just over 2%. However, it remains below the critical 14,000-millenium level. This negative sentiment, as measured by option buyers on NDX components, is unwinding quickly per the chart below, which has an overlay of a related exchange-traded fund known as the Invesco QQQ Trust Series (QQQ - 341.24).

As to the unwind, the direction of the 10-day buy-to-open put/call volume on NDX components is bullish, as there is still room for this ratio to move before hitting levels that qualify as overly optimistic.

MMO 612 4

A continued unwinding of the bearish sentiment from a few weeks ago could finally push the NDX above the elusive 14,000 level this week. In fact, the price action around the 14,000 level since mid-February resembles that of the NDX’s behavior around 12,000 in late August through November 2020. If a breakout above 14,000 occurs, the next hesitation level could be 14,176, which is about 10% above the NDX’s 2020 close.

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Options on Cboe Volatility Index (VIX - 15.65) futures expire on Wednesday morning. As such, I cannot help but go back to the last major VIX expiration in May. The observation above is one I made on Twitter in May. Since I made that comment, the VIX declined significantly, hitting a low of 15.15 on Friday, which is comparable to a low just below 17, before expiration of May VIX futures options.

Note in my Twitter comment last month that I included a May VIX open interest configuration graph. The VIX low on May 7 was around the 17 strike, before its May 19 settlement value of 25.46. The volatility pop left a huge number of put contracts worthless. 

The VIX low around the last heavy put open interest last week resembles the May action to a degree. It would take a major volatility pop within the next few days for an equivalent number of put contracts to expire worthless at Wednesday morning settlement. Nonetheless, this is something to watch during the beginning of the week.

In other words, a volatility pop could be exaggerated on any news that sparks a drop in equities. Such a scenario could be another opportunity to sell volatility after Wednesday morning VIX futures settlement and the expiration of June VIX options. As a side note, there is a Federal Open Market Committee (FOMC) meeting this week, but anything that comes out of it will probably not be released until after the VIX settles on Wednesday morning.

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