Options Expiration Selloffs

The selloff is persisting beyond expectations.  This selloff is coinciding with monthly opex week, which is the week of the 3rd Friday of each month, which can exacerbate moves with dealers delta hedging, bringing on gamma squeezes.  I have found a few examples of persistent selloffs into monthly options expiration, like we are witnessing this week, for historical reference.  I have circled the monthly options expiration week where there was heavy selling.  Many of these options expiration week selloffs were climactic, especially if the market was in a long term uptrend and the selloff had started a couple of weeks prior.

 

SPX March 2011 opex week

SPX May 2012, November 2012 opex week

SPX June 2013 opex week

SPX October 2014 opex week

SPX 2022 opex weeks

SPX August 2023, October 2023 opex weeks

The typical pattern after these heavy opex week selloffs is for the market to bottom either on Thursday or on the Friday of monthly options expiration.  In 2022, when the SPX was in an entrenched downtrend, the bounces after opex week selloffs were either weak or didn't come at all.  But for most of the other options expiration week selloffs, you had a strong bounce the following week.  

The current selloff looks similar to the August 2023 options expiration week selloff, in which the SPX was in an uptrend, but trending down for 2 weeks going into opex week.  As you can see above, the SPX bottom on Friday, August 18, 2023, opex day, and rallied strongly for the next 2 weeks.  

While market pundits will come up with various rationalizations and news to support the reason for the market selloff, the simple explanation is that the rally was quite mature at 5 months from late October to early April, and was vulnerable to a selloff based on any negative: whether it was higher CPI numbers, geopolitical events leading to investor fear and higher oil prices, or weaker than expected earnings.  Now that the SPX has sold off ~5% from the highs, with opex forces exacerbating the downmove, we are set up for a strong bounce next week.  

Regrettably, I missed the selloff and wasn't able to time a short, and to make matters worse, I am underwater on my longs as I got in too early, but I'll hang on and sell on the next bounce.  It should be a trader's market for the next 2-3 weeks, as I expect some violent choppy movement as the SPX tries to make a short term bottom.  I don't see much downside beyond SPX 4950, and I expect all bounces to face serious resistance around 5150.  Its time to get active again trading the waves in stocks, as the volatility has picked up.  

As for bonds and commodities, the bond market looks quite weak, with geopolitical events only providing very brief blips higher before going lower again.  Lately, oil has shown this pattern as well, with it selling off hard today despite the Israel retaliatory attack on Iran overnight.  The geopolitical fear trade appears to have all been played out already, which probably means lower oil and higher SPX in the coming weeks.  The pessimism towards bonds is getting a bit extreme, with many calling for 5% 10 year yields again, although this time, we're not seeing the same level of long bond selling as last October.  Bonds look close to bottoming, as most of the bad news (no long dovish Powell, sticky inflation) is reflected in the prices.  Maybe one more wave of selling moving yields towards 4.80%, but that should be the final move before yields reverse.