Bowling for Strikes
If it keeps raining on the weekend, I'm not gonna be able to sport my new bikinis!
"It all comes down to this roll. Roy Munson, a man-child, with a dream to topple bowling giant Ernie McCracken. If he strikes, he's the 1979 Odor-Eaters Champion. He's got one foot in the frying pan and one in the pressure cooker. Believe me, as a bowler, I know that right about now, your bladder feels like an overstuffed vacuum cleaner bag and your butt is kinda like an about-to-explode bratwurst."
--Ernie McCracken, Kingpin
It's quadruple witch in the city of critters and that's the perfect time to discuss some of the dynamics associated with expiration. When looking for potential pins, I always like to compare the open interest vs. the average daily volume. When there's an outsized amount of outstanding contracts relative to the number of shares traded, there's a decent chance that the strike will act as a "magnet" of sorts.
This strategy can be employed in a number of ways. For instance, if you're an Intel (INTC:Nasdaq) bear, you may look to short the underlying stock and "game" the pull to 20. If you're bullish (in a different name), you can "lean" against a particular strike by buying a stock using it (the strike) as a backstop. If you're feeling saucy and looking for a lottery ticket, expiration sometimes offers cheapie "punts" that offer a "look" through a strike price for a low level of capital commitment. It should be noted that most punts expire worthless so, if you're gonna take that shot, understand that the odds of a payout are slim.
Turning our attention to the tape, the opening (buy side) imbalances were used as a source of liquidity by the sellers and we've meandered since. It's uber early but the early tone is S's over N's as the financials are attempting to find their footing. It's worth noting that the homies are getting smushed on the heels of KB Home's (KBH:NYSE) "better" earnings (think Lehman (LEH:NYSE)) and the mo'mo' crowd is surely taking notice. Finally, looking at a chart of the S&P, there's a trendline from May 29 that "broke" yesterday and, as it stands, this morning's rally attempt is "re-testing" that level. If we punch through, S&P 1005 should act as the next resistance. Remember, past support typically acts as future resistance.
A quick check of the morning breadth shows winners outpacing losers 4:3 on the big board and losers edging winners on the Nazz. Thus far, it feels a little "mirror imagey" from yesterday as the banks, industrials (General Motors (GM:NYSE)) and pharma are sorta firm while networking, semis, storage and software is kinda soft. Again, it's early, so stay on your toes and stay disciplined.
As always, I hope this finds you well.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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