The Simpler Summary 9/15/17

September 15, 2017 | Danielle Shay

The Simpler Summary

This week marks not only monthly options expiration, but it is also quadruple witching. What does that mean? This refers to the expiration date in which four different types of contracts are all coming up on expiration on the say day. That includes stock index futures (ES, YM), stock index options (SPX, RUT) stock options (MSFT, AAPL), and single stock futures. What does that mean for the market? Well, it’s typically categorized by choppy to slightly higher (at least this year!) price action. There is also a lot of pinning going on. What is pinning, you may ask? Well, options expiration brings a lot of manipulation by hedge funds and institutions, and we like to make money off their games. With their big size, they can push stock prices around a bit, to ensure their options expire at a certain place that benefits them. As retail option traders, what does this mean? For us, it means we jump on that opportunity at hand. We can play the past patterns, we have come to recognize during monthly expiration. That means looking for opportunities to play the chop, as well as identifying pinning plays, by using a host of theta decaying options strategies. If you want to learn about our monthly expiration strategies in more detail, check out this blog – Five Reasons to Trade Monthly Expiration. Worried about options assignment? Never fear! Check out our Guide to Options Expiration.

SPX Daily Chart

(Click the image below to enlarge)

Check out this SPX daily chart. The red vertical lines show us monthly expiration Friday’s for the past 6 expiration cycles. The price action within the red boxes shows us the trend during that week. As you can see, for the most part, it is a very choppy time. While we have seen pockets of bullish strength in tickers such as BA, NVDA, and BIDU, for the most part, we have been focusing on pinning.

The Pin on AAPL

This was one of Henry’s picks for the week, and it really couldn’t have pinned better. This one caught Henry’s eye due to the extraordinarily high open interest around the $160 calls and puts in addition to his technical chart analysis. As such, he made his bets for a $160 pin on AAPL and played them via theta decaying options strategies. Keep in mind, I point these out because studying the trades that work is vital for recognizing and capitalizing on these setups the next time they come around. Let’s dive in.

AAPL Options Chain – 9/15/17

(Click the image below to enlarge)

How did Henry play it? He used a combo of theta decaying positions, a $2.5 wide iron fly, a $5 wide iron fly, and a naked straddle. Keep in mind the straddle doesn’t have the protection that comes with an iron fly, but Henry is an experienced trader who understands his risk and is placing it due to the credit he was able to get. How did he manage it? He let it go right up to the last hour before market close, in order to maximize his theta decay. He then began closing out all in the money options, to avoid assignment.

The Pin on MSFT

My favorite pin of the week was my pin on MSFT. How did I find this trade? I first started looking for charts that were sitting up against strong support or resistance zones. That lead me to MSFT, which was sitting right on a tree line. What is a tree line? It’s one of the strongest levels of support and resistance in our propriety indicator, the Voodoo lines, which is based on Elliot Wave analysis. Not only was it sitting on resistance, price was also right up against the 127.2% Fibonacci extension of the previous swing high to swing low. If you haven’t heard of it before, the 127.2% extension is generally where moves tend to terminate.

MSFT Daily Chart

(Click the image below to enlarge)

Flipping over to the options chain gave me confirmation of my pinning idea. Once I checked out the options chain, I could see that there was extraordinarily high number of $75 calls purchased. My bet, was that MSFT would close slightly below $75, ensuring those calls all expired worthless. I decided to play that with an iron fly, with my middle strike at $75.

MSFT Options Chain

(Click the image below to enlarge)

I let the theta on this one decay up until about 2:30pm CT before exiting the trade. My only regret with this trade? Should have done larger size!

The Simpler Sentiment

Let’s check in with our traders and see what they are looking for in the markets next week.

Henry – As we head into the weekend, witching expiration was basically in-line with what you might expect. We had a few names like AAPL, GS and MSFT that worked perfectly. A few others that didn’t work as well with GOOGL and AMZN. The best of these were in situations where the technical side complemented the options side. Those that didn’t work were a little harder to argue in that way. I’ll be looking at that more in tonight’s video newsletter. I’ll be making notes as well on stocks like NVDA where the argument of complacency in the stock was trumped by a standard, basic trading plan. TSLA has come to life in a big way and I may have to look at some small long positions over the weekend. The strength in BA was great, and I’m looking for LMT to follow suit. I’m going to look at some FXY calls over the weekend as a bit of a hedge. If that Squeeze in the yen fires short I’m willing to risk the premium of my calls, just in case something does happen over the weekend that would hurt my otherwise bullish portfolio.

Raghee – After the market completely shrugged off the North Korea missile launch, there’s less and less reason for traders not to embrace “BTFD” (buy the dip…) I remain overall bullish while expecting a near-term correction to the downside. Most especially in NQ futures while the KWEB Chinese Internet Stock ETF continues to punch up to higher highs. When does the NQ become bullish like the YM and ES? After KWEB rolls over. It’s a matter of flow. For now, Chinese internet stocks are more appealing that U.S. tech stocks. Until that shift, the Nasdaq will struggle to break 6000. That’s why we continue to fade (short sell) that level. Last night, courtesy the albeit brief panic, the NQZ17 hit our 5955 initial target. My open crude oil short remains valid and today’s inside day candle is a good confirmation of the exhaustion I would want to see in this overbought range on the daily time frame. Breaking the 49.50 to 49.00 level could usher in the bearish momentum I am looking for. The levels for this trade are on the spreadsheet in the member’s area. This week was also a significant one for the pound sterling in that the market finally got the hawkish Bank of England messaging it’s been waiting for. The main place to set up longs will be GBP/USD and BPZ17. Both are on the radar now for swing buys.

Carolyn – I have to call myself a cautious bull. I’m bullish because the pattern is bullish on the SPX and the bulls have all the moving averages to support a bullish scenario. I’m cautious however because I have Fibonacci time resistance to the current rally over this weekend AND we are closer to Fibonacci EXTENSIONS where many moved tend to terminate (if only temporarily). So…..I’m just suggesting to subscribers that they ratchet up stops on longs. I’m also telling those who are shorter term oriented to NOT take any counter trend trades unless you are nimble and see sell triggers….and know EXACTLY what you are doing. Counter trend stuff is only for the nimble short term traders!!

Danielle – I’m bullish going into next week, but definitely a cautious bull. I’m not a fan of holding too many positions over the weekend, I prefer the quick in-and-out method of swing trading. As such, I played options expiration this week via theta decaying positions in MSFT, AAPL, BMY and JPM. I have almost a clean slate, and I’m looking for new setups going into next week. I have my eye on EA, WMT and LMT for long entries early next week.

Trade of the Week Follow-Up

Expert: Henry Gambell
Trade Date: September 11th, 2017
Strategy: Iron fly on IBM at support, planning on gaining theta decay that we will get through the iron fly if IBM continues to trade at $145 into Friday expiration. The idea: make money with the passage of time through the monthly expiration chop.

(Click the image below to enlarge)

Result: This pick of HG’s pinned perfectly. His profit target of 50% on the spread was hit and for those who held longer, would have received almost a full profit on this iron fly.
If you haven’t gotten a chance to check out our trading room, click here to sign-up for a $7 trial. For those of you who are members, let me know if you need any help understanding or applying our strategies. I can be reached by emailing Danielle at support@simplertrading.com, or by commenting below.