Op-Ex Max Pain

As is usually the case on op-ex Fridays (which include the weeklies now), the market tends to open and linger near Thursday's close for the max-pain options expiration pin. Who writes most options and who buys them? you can probably easily answer that question and thus understand why the options expiration max pain pin is so profitable, ALL premiums are lost if they expire worthless which most do and the max-pain pin is a big part of making sure they do, a nice pay day on Friday.


There are numerous signs this is the case and even how the market is fighting the USD/JPY correlation and the much more extreme 30-year yield correlation.

 As our recent currency analysis has shown, the USD was expected to weaknen, the Yen to strengthen sending the USD/JPY lower , which has clearly happened overnight. This is the USD/JPY (candlesticks) vs the SPX E-mini futures (purple line).

Note the current dislocation from the correlation which we saw overnight as ES tried to move higher against the USD/JPY and quickly failed, the same thing is happening right now, as I said, I'm 80% sure this is because of the max-pain pin in which they have to keep the market at a certain level so the highest dollar amount, not open interest, of options expire worthless.

This is the chart I just showed of the SPY vs the 30 year rates (red) and how they have severely dislocated lower, the market has some catching DOWN to do after the max-pain options expiration pin expires.

As for the lever to hold the market at the max pain level, I'm sure you can guess with 3 guesses, HYG was probably one of them and that's the winner.

As shown and posted yesterday, there's no significant divegrence in HYG that supports the market like the one we saw in to the October lows. See last night's post Looking Back To Move Forward. in which the exact data from October 15th lows was posted, all from the October 15th post, Important Update.

HYG as a leading indicator is also flashing bright RED warning signs like other leading indicators, way stronger than what we saw at the October lows, which were part of the analysis that went in to the "Extremely strong move up" back then.

This is the HYG/SPX trend (SPX green) for this cycle alone, note HYG leading early on and turned to lagging, interestingly there was an early turn, much earlier than I'd have normally expected in HYG, but not just HYG, nearly every leading indicator went south around the same area which just boosts my theory that the next pivot or leg down will be even stronger than this leg up, which is what I expected as you can see from last night's post above as I wrote that on October 15th, I believe I even said I felt it was a 99% probability.

On a primary trend (in Dow theory this is what we consider bull/bear markets, trends of about 5 years)...

HYG is seeing very string dislocation right at the area of the SPX that is drawn as a broadening top, look at HYG's leading status at each of the SPX (green) tops and how HYG leads them lower and look at the current dislocation, considering where price is, it is by far the largest.

As for HYG 3C charts, pretty much as expected since yesterday's update and considering this morning's action (so long as the market doesn't move too fast before I get this post out)...

 Yesterday's leading negative and still in a leading negative position with a smaller relative positive at this morning's open, HYG is the lever to counteract USD/JPY and 30 year rates, but as the charts show, it only has that small divegrence on a 1 min chart this morning which can't take it far.

 2 min

5 min

60 min showing the October lows at the white arrow as well as HYG's leading negative divegrence that caused a leading indicator decline in the August cycle's top.

A quick look around shows all other Leading Indicators are still on track and trend moving lower as they have been.

The one difference is the other Leading Indicator we use, 5 year yields, they too have plunged and tend to act like a magnet pulling the market to them.

These I tend to look at as shorter lead time leading indicators, more timing indicators rather than intensity. I think the correlation between the SPX (green) and 5 year rates (red) is pretty clear as are the implications once the op-ex pin ends.

The other interesting change, virtually guaranteeing HYG is being used as an intraday lever for options expiration pinning is High Yield credit, not HYG, but HY Credit which is similar, it's just not used as a market lever as HYG is much more popular, nonetheless, HY Credit traders aren't buying this move anymore and there's an increased rate of flow out off HY Credit today...

 The HY Credit trend similar to HYG in this cycle and most other leading indicators, but this morning there's an increased rate of selling...

HY credit vs the SPX near term with a sharp directional plunge this morning beyond the normal trend decay.