Option Expiration Rally
After a dull open, the SPU pit came alive with institutional buyers getting business done before expiration Friday.
One of the ways we like to trade the day before option expiration is to buy pullbacks of 200-350 points for moves of 400-500 points. To give a real time example, we have a session high of 1503, matching yesterday’s high. About 2 minutes ago, the SPU traded below 1500. I was a buyer between 1500 and 1499.50 for a move through the highs towards the 1505 area. This pattern tends to be played out throughout the session, and alert traders can take advantage of this. What really sets this strategy apart, however, is the minimizing of risk. Simply put, this is not a day to buy new highs for range extensions, and buy purchasing dips of 200-350 points you tend to buy when the market has stabilized. If this scenario does not play out and we head lower, I risk about 150 SPU points or 15 ticks before getting out of my longs.
One situation to watch closely for the remainder of the day will be the performance of the financials and the semiconductors. If these sectors start reversing this morning’s gains, we could trade back below 1490. On the upside today, I continue to look for 1505-1506 to be traded. In addition, I have major resistance between 1510.50-1520.00. I will only be scalp trading if we get into this zone.