2 SPY Strikes to Watch This Expiration Week

Short covering last week was likely triggered by heavy put open interest buildup

Senior Vice President of Research
Sep 12, 2022 at 8:29 AM
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For bulls, if there was any consolation with respect to last week, the round 3,900 level held the SPX’s lows on Thursday and Friday. This level is extremely important, as it is the site of the mid-July breakout level above a trendline connecting lower highs since March and its close on the eve of the Fed’s last rate hike…Moreover, 3,904 is a 61.8% Fibonacci retracement of the June low and August high. There is also potential support sitting at 3,900 using the lows from June, July, and last week as the basis for the trendline. You should be on high alert for the potential of a severe, sharp decline these next two weeks as long as the SPY remains below the 400-strike. This is especially if it dips below the 390-strike between now and Sept. 16 expirationif technical support on a chart ($390) holds nearer to and into expiration day, there could be short covering related to put open interest at the 390 strike and other heavy put open interest strikes immediately below.

              - Monday Morning Outlook, Sept. 6, 2022

In last week’s commentary, I spent considerable time discussing why traders should be on heightened alert for another June-like sharp selloff. With standard September expiration at that time less than two weeks away, as well as the heavy build in put open interest (that usually occurs during end-of-quarter expiration months), the broader market’s weakness in prior days was a major risk for bulls.

I explained that after the heavy put open interest 400-strike on the SPDR S&P 500 ETF Trust (SPY – 406.60) had been breached, more delta-hedge selling was likely if another heavy put strike at 390 was violated. Moreover, the SPY 390 strike coincides with the S&P 500 Index's (SPX – 4,067.36) 3,900 level, which I explained is an important level from a chart perspective. The bottom line was bulls ran the risk of heavy selling related to the options market and from a technical perspective if the 3,900-century mark was penetrated to the downside.

As it turned out, the bulls dodged a bullet last week, as headlines about an increasing probability for a 75-basis point rate hike surfaced with respect to the Federal Open Market Committee (FOMC) meeting on Sept. 20-21. On Tuesday, the first trading day of the week following the Labor Day holiday, bulls had to endure a third consecutive day in which the SPX flirted with the important 3,900 level.

However, support held for a third consecutive day and as buyers came in the other possibility that I discussed last week emerged. That is, short covering related to the heavy SPY put open interest at the 390 strike (and strikes immediately below) likely occurred. And more short covering likely took place related to the heavy put open interest at the SPY 400 strike as it moved comfortably back above the mark on Friday morning.

Per the chart below, not only was it encouraging that the SPX held technical support at 3,900, but the rally pushed it back above its 50-day moving average, which held the July low. The break of this moving average last week may have shaken out weaker hands, which represents future buying power.

But the SPX is not out of the woods entirely. Just as it came into last week at a trendline connecting lows since June, it will enter this week at a trendline connecting lower highs since the mid-August peak. And just 2% above this trendline is the late-May/early-June high that preceded the sharp decline into the June expiration week trough. What's more, only 40 points above that level is 4,200, the SPX’s close before Federal Reserve Chairman Powell’s speech in Jackson Hole, Wyoming, when he indicated monetary policy will likely become restrictive for a long period of time.

For what it is worth, last week’s SPX close was above its reaction close the day of Powell’s statement on monetary policy in Jackson Hole. This could be a major risk to bears, as anyone that sold or shorted the market the following Monday or after, is now underwater in that trade.


Speaking of those betting against stocks, there are plenty when observing the action of equity option buyers and the 10-day, equity-only, put-call volume ratio. With the equity market finding support last week and rallying strongly, this could be a short-term risk to bears -- if such pessimism has climaxed and we see fewer puts bought relative to calls in coming days.

Going into last week, for example, check out the 10-day, equity-only, put-call volume ratio on SPX components in the chart below. The ratio was near its 2020 Covid highs that marked a significant bottom in the market. Such extremes set the stage for meaningful short-term bottoms that can drive the SPX through short-term resistance levels. And sometimes extremes like that can mark longer-term bottoms. But again, in order for a major unwind of this sentiment extreme to occur, the market must make enough headway to squeeze shorts out of positions and pressure those on the sidelines to move back into the market. That is why it is imperative to focus on technical levels too, such as those discussed above.


Looking ahead to standard September expiration week (and beyond), at first glance it would appear that bulls sit in a slightly better place relative to last week from the perspective that the SPY is trading more than six points above the 400 strike, which is the first strike below the market with major put open interest. That is more room than last week, when the SPY came in only two points above a major put open interest strike that if breached, could have sparked delta-hedge selling.

I italicized “at first glance” in the above paragraph because there are catalysts this week that could produce volatility in either direction, implying the SPY 400 strike is still very much in play. First and foremost is inflation data due out Tuesday (Consumer Price Index numbers for August) and Wednesday (Producer Price Index for August). On Wednesday, data on August retail sales is due to be released.

If bulls get through expiration week unscathed after the slew of economic data is released, it is still important to focus on the SPY Sept. 21 and 23 expiration options, which will likely get increased activity for those looking to either hedge or speculate on the equity market’s reaction to the Sept. 20-21 FOMC meeting. The quarterly Sept. 30 options already have a decent amount of put open interest, likely those hedging portfolios through quarter end and thus, could have an impact on the broader market through the month's end. Next week, I will update the chart, absent this week’s expiring options.

One way to think of the open interest configuration chart of the SPY below, with risk-reward in mind, is that the larger red bars at each strike represent potential magnets. The bigger the bar, the more magnetic that strike is as the underlying approaches it from above. In other words, the SPY 400 strike represents the first potential magnet if a decline, sparked perhaps by various economic data releases this week, of size occurs this week. And the further the SPY is above that 400 strike, there is decreasing short-covering potential related to the put open interest below.

Continue to be in tune with where the SPY is in relation to key put strikes as we move through the rest of this month. This is especially important as we have plenty of market moving events on the immediate horizon.


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

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