January Option Expiration Week
Indices were quite negative for the first full trading week of January, though starting that selloff from a gap up Monday meant that the new low probably “felt” worse than it really was in comparison to the prior week’s low. A couple of important points for this week:
1) Gamma (GEX) is solidly negative, tilting probabilities more toward the downside initially
2)We’re approach monthly option expiration this week, and earnings are coming up, so volatility in both directions is very possible
We discuss aspects of what we’re seeing for indices and some major stocks as well as some important concepts of portfolio management in today’s YouTube video, so check it out by clicking here.
Glancing at the VIX chart above, the Keltner channel are in an uptrend, the VIX is above the Hull moving average, and we see an ascending pattern that in the past has continued until a larger VIX spike occurs. The size and timing of such a spike is difficult to predict, but we can see the upper daily Keltner channel is just under 23, and you can see that spikes regularly go beyond the Keltner channel due to the dynamic and emotional nature of market selloffs. So the VIX is potentially concerning as far as this drop not being over. Volatility bulls will want to see the VIX hold the 17 area on any decline in the VIX.
Looking at QQQ below, we still haven’t seen the lower Keltner channel visited, which makes QQQ the only index to not yet visit that indicator. The current lower level is just above 501, a few points below Friday’s low. Perhaps the current decline (whether part of a larger emerging bear market or a correction in a bull market) will conclude once QQQ finally shows short-term capitulation? We might find out soon.
QQQ is currently just above the lower G2 Dealer Cluster zone, which ranges from 497-505. This zone perfectly encompasses the lower Keltner channel. Notice QQQ showed very little option volume at higher prices Friday, with most of the volume between 500-510.
QQQ GEX is in negative territory, but not at an extreme relative to where GEX has been over the last 52 weeks, as demonstrated by our GEX Intensity Gauge. Looking at the total net GEX at each strike on the graph, you can see that the negative GEX clusters still beat the positive clusters in size, particularly down toward the 470 level.
We won’t spend a lot of time on SPX this evening, but the GEX picture looks solidly negative at -1.2B GEX, and a fairly similar profile compared to QQQ’s comparison of negative strikes to positive, though SPX has already tagged the lower Keltner channel. With the degree of overlap in QQQ and SPX’s holdings right now (upwards of 80%), it’s hard to imagine the two indices not moving somewhat similarly at the current time, which would imply an overshoot for SPX to the downside if QQQ decides to tag that lower channel, potentially. It’s also hard to say whether or not such a move occurs overnight or intraday during the cash session, which could see an intraday recovery begin, so even calling for some incremental downside is not a slam-dunk for short sellers to ride the market lower.
Some of the defensive stocks we’ve brought up in Discord were actually positive Friday, some dramatically so, in the case of Walgreen’s (WBA), though DIA still declined. DIA gapped below the Hull and headed down to 419, below the lower Keltner channel, also seeing DIA’s GEX flip negative.
While the 400 and 405 strikes do have representation for this coming Friday’s expiration, the 435 cluster is still something I’m watching given its relative size, though the large negative GEX at 425 will be an area DIA needs to overcome in order to have a shot at those higher GEX targets. Most of the 425 GEX expires this coming Friday.
DIA’s GEX Levels chart still looks encouraging, we’re at the lower edge of the G2 Dealer Cluster and most volume was at higher strikes, including 440. Remember, DIA led the way down, dropping while QQQ was living in la-la land, so perhaps a recovery will also see DIA (and IWM) head higher first? It’s not guaranteed, but I wouldn’t be surprised.
With OpEx this week, we need to be ready for potential moves in both directions, it’s possible that the Citadel Premium Killing Machine wants to target both calls and puts…We’ll be looking for potential negative GEX extremes on the GEX Intensity Gauge for contrarian reversals and we’ll also look at positive momentum where it exists for GEX targets at higher prices. Join us in Discord and we’ll do our best to share useful information as the week goes on!
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