August 11, 2022

The S&P500 just made a 50% retracement from the 5.5 month high/low range in just 8 weeks.

And what a difference 8 weeks make when looking at the Open Interest board.

I went on the Open Interest Tool and clicked on every expiration for the rest of 2023 including Wednesday’s expiration. I then clicked “Chart.” The following graph pops up, which gives me a look at where the bodies (dead & alive) lie:

You can see the massive amounts of Puts per strike starting at the $330 level all the way up to the $400 level, where there is ~500,000 Puts. Even at the $410 Put you get close to 200k and another 100k at the $420 strike.

The market is like water. It follows the least resistance.

Puts are resistance on the way down.

They are a good part of the reason the market has gone up so fast.

Now, you can’t see on the chart, but there are about 20,000 Puts at each $5 intervals in the August 19^th expiration between $410 and $425.

Jackson Hole

The next big known event is Jackson Hole on August 25-27^th, after that expiration.

I want to make sure we have something on for that week. So, I was curious about the Open Interest after next week’s expiration and September 2^nd. This is how it looks:

This looks much different that the first chart. You can see that there is very little going on until you get to the $400 level.

Again, this never means the “SPY WILL DROP.”
It only means that the “SPY COULD DROP QUICKLY.”

First, we need a “turn.” And bear markets make it very difficult to catch any/all turns. That is their nature.

The Trade

When I did the SPY $405 Put Spread a couple weeks ago, I mentioned the case for SPY $419-$420. We are here.

It’s incredibly important not to miss these Put entries that allow us to jump in with Calls. I missed a quick opening in April and it cost me.

Here’s the trade that makes sense with SPY $420:

Buy 1 August 29^th $415 Puts $4.40
Sell 1 August 19^th $408 Puts $1.12
Net Debit = $3.28

The Target Stock Price Range is $400-$405.

Futures are up overnight and there are economic numbers tomorrow that can push the SPY up further.

If SPY opens $422, then you can move the strikes to $417 and $410.

If SPY is $425 then $420 and $413 would be great. Move up the strikes to get that $3.25 range on price for a $7 spread.

  Note: The SPY opened up near $423. We entered the $418-$411 at $3.25  

  ***UPDATE: This trade idea went up 417%.