BigTrends

Terrible timing for bad news hitting the market today with the announcement of fraud charges being filed against Goldman Sachs.  The market was just starting to appear safe to many investors with a weekly close above 1200 on the SPX clearly in sight.  People were being told that investing in stocks was acceptable again, and they were beginning to believe those words and then BAM...

Then the SEC drops the bombshell this morning, and rightfully so, that Goldman Sachs deceived investors when creating and selling CDOs. 

Once again, the contrarian investor could have been tipped off by the most common sell signal: The major cover story for a business magazine.  In this case, BusinessWeek in their April 12th issue printed a cover story about how Goldman Executives claim that they didn't sell America short.  People had questioned the validity of Goldman's profits while the other banks were hemorrhaging money, but few could put a finger on any true wrong doing.

The news of this civil lawsuit will linger over the weekend, and most expect that the reaction to this news Monday morning from markets around the world will not look good.  Continue to watch the VIX 15 minute chart as your clue to if or when the selling stops.  This VIX rally is similar to what we saw in late January, where swift selling pressure took the markets down for a few days before the bull trend kicked back into gear.  The follow through on Monday will be the key to determining where this market is headed over the coming weeks.

Finally, from an options perspective, the Goldman Sachs (GS) trade today is a very interesting one, because of the fact that this news hit on expiration Friday.  Many people were short Goldman puts, in particular the the April 160s and 165s.  It's not clear whether they were naked short these options or if they had some protection, but regardless, they sold them with the expectation that they would expire worthless today.  The news obviously turned this trade upside-down, so don't be surprised if GS gets pinned at the close today around an options strike of 155 or 160.

The S&P 500 Index tracking ETF (SPY) closed today right around the 115.00 level.  This is a strike price where there is fairly heavy open interest, especially in the Jan 115 Calls.  There is a possibility that we may get "pinned" right around this strike price on Expiration Friday.

However, the good news for the bullish case is that last Expiration, the SPYders got stuck at 110 on Expiration Friday.  The following week they were "freed" of that expiring open interest, and subsequently rallied for the next several trading days.  As you can see on the following chart, the December 18th Friday low was 109.28, by the next Thursday (Christmas Eve) they reached a high of 112.61.

For those interested in index option trading, we have the BigTrends Index Options Timer program, which gives specific real-time, short-term trades on the SPYders and other indices.

There looks to be a lot of November Expiration related "pinning" going on as we head into Friday's close.

The S&P 500 (SPY) is starting to move towards 110 ... a last hour spike to that level would be likely a "false" pin that would be reversed on Monday, in my view.

Many big equities are moving right towards strike price pin levels, including (AAPL) at 200, (GOOG) at 570,  (RIMM) at 60, (DIS) at 30, (AIG) at 35, (FITB) at 10, (NFLX) at 60, (AMZN) at 130, (COST) at 60, (DISH) at 20, (MON) at 80, (HPQ) at 50, (KO) at 57.5, among others.

As we've previously mentioned, this kind of "pinning" action, where a stock closes right around an option strike price on an Expiration Friday is due to a variety of factors.  Among these are technical, manipulation, psychological, but also the actual option open interest at these strikes.  The open interest causes market makers and hedgers to buy and sell the stock around those levels to keep the books balanced (delta neutral, etc).

We've seen it time and time again, and this afternoon looks like no exception.

Often on Expiration Friday, you will find that certain stocks, indices, & ETFs get basically "stuck" around a certain round level that corresponds to an option strike price.

Why does this occur?  Well, there are a variety of factors ... and it is not usually just comprised of pure "market manipulation" as many think.

If a stock is lingering around a strike price, the expiring open interest there (especially if it is sizeable) may cause market makers to constantly be buying and selling around that level, esentially causing the stock to get pinned.  This is because market makers are usually hedging their delta (and gamma), and their front month option greeks will be changing as a stock osciallates around a strike price.

Another factor is that there may be a great deal of options trading hands around that strike price, which then causes the market makers to hedge with stock trades, as well.  There also is the psychological factor that traders and stocks are often drawn to "round" numbers such as strike prices, and there will be a significant number of buyers and sellers around that number, for example.  Also, many of these round areas are important from a technical perspective and may be the location of important resistance or support.

With that in mind, there certainly is a "pinning effect" that is often seen on Expiration Fridays.  This may be option related and may be "released" from the shares on Monday (but that is certainly not guaranteed).  Taking a quick scan of stock screens, here are some that jump out at me today that ended very close to strike prices:

Google (GOOG) - 430 strike
Citigroup (C)- 3 strike
Pfizer (PFE) - 15 strike
Bank of America (BAC) - 13 strike
Caterpillar (CAT) - 34 strike
Yahoo (YHOO) - 17 strike
Baidu (BIDU) -320 strike
Dish Network (DISH) - 16 strike
First Solar (FSLR) - 145 strike
SPDR Gold (GLD) - 92 strike
Mastercard (MA) - 180 strike
Wells Fargo (WFC) - 25 strike
IBM (IBM) - 115 strike
McDonalds (MCD) - 57.5 strike
JP Morgan (JPM) - 37  strike

Did you see in the last 10/15 minutes of the normal trading day, they moved the SPY down from about 87.50 to right around 87?  Well guess what, there was fairly heavy April SPY Open Interest at the 87 strike.  It was basically the 2nd highest level of open interest near current levels (85 being higher). 

See-saw action here today but mostly constructive.  One thing we know about expiration Friday is the pinning effect, where open interest levels rule where prices seem to magically land at the close.   One thing notable about this rally is the broad strength, something lacking during the last rally (nov/dec 2008).  Also, the VIX fell from 80 to about 36, this time around it fell from 55 to 35, so the velocity is slower, the fear less of an issue.  We should see some kind of correction, but as we know...markets are irrational and can extend further than we 'think' they should go.