Options pinning

Posted by downtowntrader | 6/15/2006 10:12:00 PM | 3 comments »

Well we got to the top of some downtrend channels pretty quickly after a really strong day today. How much of this is short covering or options pinning remains to be seen, but channels this steep cannot be sustained for very long. I would expect some trouble with these resistance levels but I don't think a quick reversal is in the cards.

Tomorrow is options expiration Friday and as such I will not be daytrading. I was expecting a strong move to the upside and there may be more of the same early tomorrow. By the end of the day the program trading will really kick in. I would expect that we would see some weakness early next week, especially if tomorrow is a strong day.

Here is a chart of the SP500. Note the steep downtrend channel and how we have moved pretty quickly to near the top of the channel. There are some signs that we will edge our way higher after the next few days of choppiness. Take a look at the stocks trading above the 50sma indicator and notice it is at an important low that marked the October low.
Here is the Nasdaq chart showing similar indicators, however, the Nasdaq is clearly below important support. Something that is interesting, is that the Nasdaq outperformed today and the Nas/SP500 ratio is starting to turn up a little signifying that market participants may be ready put some money to work.

I mentioned that I don't trade on Options expiration and the main reason is the program trading and pinning of prices by the institutions. Keep in mind that in general, it is the institutions that write options and retail investors that buy them, and since they have more money they can protect their positions. If you are in a position or are trading, keep an eye on the open interest and try to look at it from the perspective of an institution that has written all these options to the retails. Here is an example, although it is a little harder to manipulate the SPY's. Look at the SPY chart and where it closed (126).

Now take a look at open interest for June Calls and Puts. There are a lot more puts out there then calls, therefore there will be more people in pain if the price runs up tomorrow. I would expect that there would be no way they let it fall below 125 so I would not be short tomorrow.

Although I expect some continued stength in the coming weeks, I believe that we have topped and a new downtrend will begin in the near future. I just don't think it will happen in the next week. I will be playing to the longside for daytrades or short swings for now while keeping my eye on the recent lows.

Good Luck,



  1. Anonymous // 12:25 AM  


    What do you mean when you say "play to the downside of daytrades"?

    Scott K

  2. Anonymous // 12:25 AM  


    I should have written "long side"


  3. downtowntrader // 1:31 PM  

    What I mean is I will lean to playing long vs short. The bottom line is I think the risk reward ratio is higher for longs right now, although probably quite risky.