Reading the Options Open Interest Tea Leaves ~ The Risk Averse Alert

Monday, September 21, 2009

Reading the Options Open Interest Tea Leaves

Well, we just might be getting a clue of what to expect straight ahead now that the September options contract is off the board and the front month moves to October. Lots o' OEX Put contracts opened last week ... speculating on the prospect of sudden death. How do I know this? Well, yet again a new front month begins with OEX Call open interest exceeding Put open interest (this after going out September with 60k more Puts than Calls). That's how.

What, then, does last week's OEX options trade hint?

How about an increased likelihood that, the market will remain levitated in some fashion facilitating the collection of premiums on bets the market will fall? After all, September and October historically are the stock market's worst months.

So, what might this mean per the Elliott wave count?

Nothing. In levitating we could see unfold some form of a rising wedge — a formation appearing in the fifth and final wave in a five wave sequence.

The question is, in which fifth wave might this rising wedge form? The one that began early-July (wave 5 [of C]), or early-September (wave v of 5 [of C])?

Either way, it is entirely reasonable to expect some near-term pressure — something to excite the bear camp and help extract Put premium as the October contract ages.

NYSE 5-min

One significant difference today versus last Monday was the failure to reverse the negative effects of that relatively thinner offering of shares put up for sale at today's open. It appears suckers were a little less willing today to bid the "bargains" and so, might require steeper bargains still.

The sell-side imbalance at the open was a bit of an eye-opener. On one hand, such relative strength damage on so little selling, relatively speaking (see today's volume), is a bad omen if you are of the bullish persuasion. Yet with the urgency to sell seemingly evaporating once again following today's open, those of the bearish persuasion, like me, ought recognize that, the ongoing distribution of equity from strong hands to weak looks to persist for as long as can be, right up until such time as it becomes unavoidable to dump long positions with abandon.

And as sure as the physical economy possesses even less capacity today than last year to operate at a profit ... and as sure as the mountain of financial claims against this shrinking capacity has only grown larger ... that moment will arrive none too soon, no doubt.

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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