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Market-Wide Options Expiry, Decreasing Gamma Threaten Stocks at Overbought Levels

Published 21/06/2024, 06:13
NDX
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US500
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Stocks finished flattish, with the S&P 500 down around 20 bps, but with 297 stocks up and just 204 down on the day. Tomorrow is the big quadruple witching day, with a large amount of gamma due to roll-off in the options market.

The index options will expire at the open, while ETF and single stock options will expire at the close. Typically, when gamma levels decrease in the market, the trading range, also known as volatility, expands.

Additionally, the QYLD ETF will sell a covered call for the July expiration date tomorrow, which should create a sizeable amount of NDX futures to sell and be delta-hedged by the market maker.

Today, the NASDAQ 100 was down despite the QYLD ETF buying back a notional $10 billion call position it sold back in May. Typically, the ETF will sell around 5,000 contracts of an at-the-money option for the next month’s expiration date.QYLD ETF Chart

The market-wide options expiration date and decreasing amount of gamma could allow the market to turn lower and the recent rally to finally break from a timing perspective. It isn’t unusual to see the market change trends around OPEX dates.

Nasdaq 100 in a Rising Wedge

Additionally, as discussed over the weekend, the NASDAQ 100 has a rising wedge pattern in the potential throw-over phase, a 100% extension, and a 61.8% extension from two different points over the past 18 months. It seems like a good place to turn.

US 100 Index-Daily Chart

One potential target would be the 61.8% retracement level, which many technicians look for during a retracement phase, along with the 38.2% retracement level.

Now, it could be entirely by chance; however, a 61.8% retracement in the NASDAQ 100 of the entire rally off of the October 2022 low would bring the NDX back to the lows seen in October 2023, wiping out all of the gains witnessed since then.Nasdaq 100-Daily Chart

A similar style retracement in the S&P 500 would result in the index falling to around 4,200.S&P 500 Index-Daily Chart

You can look at the setups, and considering how over-bought the markets are, it is possible to see something of that size. Fundamentally, PE ratios are high, and fundamentals won’t support this market. More importantly, the technicals are significantly overextended on the NASDAQ.

At least as of today, the NASDAQ 100 had an RSI of 71.2 and was above the upper Bollinger band on the weekly chart, which doesn’t happen often. Since 2018, those conditions have happened a few times, and those times saw some pretty sizeable sell-offs. It is something to be aware of and not suggesting at-all someone should “short” the market.Nasdaq 100-Weekly Chart

In the meantime, oil was stronger today and moved above $81 again. It looks like a solid base has formed in oil over the last year; despite multiple times, it could have broken lower, and momentum seems to be turning higher. A move in oil back to $87 doesn’t seem that crazy to me.

WTI Daily Chart

Western Digital's (NASDAQ:WDC) chart is interesting at the moment, as it rests on an uptrend. The RSI trend has broken, suggesting that momentum is fading and that perhaps the stock will break lower. A break of the trend line at $76 could lead to a further decline to around $71 or so. Micron (NASDAQ:MU) will also be reporting next week, and that could have a heavy hand on Western Digital’s next move.WDC-Daily Chart

Anyway, that’s all.

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