OPX Survival Guide (by Fujisan)

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OPX (OPtions eXpiration)  is here once again – bulls' dream, bears' nightmare – OPX week typically has an upside bias and I will go through them in details together with the option strategies. 


Not much change from last week.  DIA & INDU are taking the exact route as projected and forming a perfect symmetrical pattern both in time and price.  This is almost a textbook like and too good to be true.  I am expecting the market to make an intermediate peak during the OPX week, and possibly make a turn shortly after OPX.


If INDU busts higher than my target price next week, then the next target would be 10,495 where a = c pattern completes from March low.

SPY Three Drives Pattern

SPY started to look a lot like M pattern (i.e., double top) than three drives pattern, but we could only confirm this pattern in a retrospect.  a=c target from March for SPY is 116.01.


IWM M&A or H&S??

IWM could be either M~A pattern or H&S pattern.  It's your pick.


On an hourly chart, I see a possible Gartley pattern formation in IWM.



Here is the Qs Weekly chart.  Qs was able to close above the previous week's high and above 61.8% fib line.  It also closed above the previous swing point of 43.83.  This week's close is bullish and being set up to retest the next swing point of 48.57 (i.e., 78.6% fib).  With GOOG and AMZN breaking out of the consolidation, I could see Qs leading a rally going into the next year.


Here is the QLD daily.  As it closed above the previous high, this is the confirmation of the third wave up and another three drives pattern with a target price of 67.77.



As I have discussed this possibility last week, GOOG started breaking out of the consolidation.  I have an immediate target of 580 (next swing point) and then possibly 607.


EUR/USD – Three Drives or H&S?

EUR/USD seems to be forming a H&S.  The recent high did not really test the previous high, and therefore, it's not really a "double top".  I'm waiting for a confirmation at this point.


VIX Daily Chart 


If this pattern holds, VIX will come to test the recent low, and snap right back after that.  It would be a pretty safe place to load up some speculative VIX long positions when getting close to 20 area. 


OPX Historical Data

OPX typically is a bullish week and here are some statistics of OPX week.  Typical consensus of OPX week is the followings:

1. Monday is the most bearish day.
2. Tuesday is the most volatile day.
3. Wednesday is the most bullish day.
4. Monday after OPX is a down day.

 Source: SeekingAlpha.con

Here is the statistics about day after OPX.

 Source: MarketSci Blog.com

Source: MarketSci Blog.com

If we just limit the statistics to this particular rally (from March low), there were only 2 down OPX weeks (as we all know, that was a part of the world famous H&S failed pattern back in June) out of a total of 8 OPX.  This of course doesn't guarantee anything for this coming OPX, but after all, we are all in the probability business, and we should know our odds going into OPX.  

The average price movement of the week is 46 point, which is pretty huge compared with the regular weeks' price movement.  You will also notice that, when the OPX is an up week, it tends to finish the high of the week.

Also, it's worth mentioning that, when OPX Friday is a down day, there is a high probability that the following Monday will be a down day.


OPX Credit Spread

As the OPX is getting closer, the front month option's time premium is getting smaller, and you will see as little as $0.25~$0.50 time premium in OTM options whereas ITM options still have the intrinsic value.  This will give an option seller (like me) a great opportunity to sell ITM options with very cheap OTM options as a protection – called a "credit spread".

Here is an example of SPY credit spread (put call spread) and this is not quite 1 to 3 risk/reward ratio as of yet, but as the OPX week progresses, you will find a pretty good deal if you know how to pick the direction.  As this is a highly speculative position, please expect to lose the entire premium if the trade goes against you (no stop loss). 

As illustrated above, if you are able to catch the exact bottom and the top of the week, you can enjoy just as much as 4~5% price movement, but that probably won't happen.  However, in this strategy, if you could catch 1% of the move, you could easily double your position.

SPY Bear Put Spread

As the holiday season and the year end is approaching, it's hard to imagine why the fund managers would possibly initiate a major sell off at this point, as many bears speculate.  As this is typically a bullish time of the year, I don't expect anything other than a "routine" sell off as seen in the past 8 months.

I'm not planning to get overly aggressive on the short side UNLESS the neckline is being taken out.  In the mean time, here is one of the examples of SPY bear put spread.


I will be a buyer upon the pullback if the neckline holds.  The tech will lead the rally and most likely the rest will follow.

I hope you enjoyed my weekly update.  See you next week, everyone!