In August 2021, prominent CNBC anchor Carl Quintanilla posted an annotated chart of SPY over the past year.
The annotations showed that SPY consistently sold off around the middle of the month for the past 4 months. Each time, the index would immediately bounce back the next day.
A few astute commenters correctly pointed out that each dip happened not just in mid-month but exactly on the month’s options expiry day (otherwise known as monthly OpEx).
In this quick issue, we’ll go over:
What monthly OpEx is
Why it’s significant to the market
And discuss what happened after Quintanilla posted the chart to his 400k+ followers
💡 What’s Monthly OpEx?
Historically, options were only available with monthly expiration dates. This expiration date would fall on the 3rd Friday of each month and is called OpEx.
Although many stocks now have weekly options expirations and SPY even has daily expirations, monthly options still attract the most liquidity from options traders.
💡 What Makes OpEx Important?
Because so much liquidity goes into monthly options, they attract an out-sized amount of open interest (# of open options contracts).
On OpEx, all these open contracts expire en masse and the entire market goes through a mini “reset” process.
The “reset” process is too complex to dive into for this issue but the general idea is that a LOT of money changes hands on OpEx.
This elevated trading volume is caused by a myriad of market dynamics like Options Market Makers unwinding their hedges as expiring contracts fall off their books and options traders actively managing their positions by closing out expiring contracts and opening new ones.
The above is a chart of the S&P 500 over the last six years with monthly OpEx annotated as red dots.
Most dots follow the trend but notice how a few of them occur right on important market turning points.
The paramount example of this is the 2020 pandemic crash.
People were already furiously searching about the virus in January yet the market plodded on, seemingly with nerves of steel.
It was not until mid-February, right after February OpEx, did the crash begin. The stock market free fell throughout March but guess when did it recover? Right after March OpEx.
This is the power and importance of OpEx.
💡 Bounce. Bounce. Bounce. Bounce… And then?
Back to Carl Quintanilla’s tweet.
He found a really consistent pattern in SPY where the market will crash and bounce after every single OpEx.
He shared this pattern with his massive audience. Everyone started to talk about it.
When the next OpEx rolled around, the market started selling off earlier than the prior OpEx’s and then… the very next trading day after OpEx the market gapped down hard instead of jumping back up as before.
This wiped out all the short-term traders piled into this mean reversal trade that Carl Quintanilla was hinting at.
After this OpEx broke the prior trend, future OpEx’s also stopped exhibiting the same consistent sell-off and bounce-back behavior.
The moral of the story? Beware of crowded trades.
When someone as popular (in financial media) as Carl Quintanilla is talking about it, that means the edge has likely been whittled down.
💎 Important Market Update (for paid subscribers)
This week gives us a great roadmap for the rest of Q1. Here’s what I see.