🧐 ProPicks AI October update is out now! See which stocks made the listPick Stocks with AI

Steepening Yield-Curve, $5 Billion Options Sell-Off Threaten Stock Rally

Published 09/20/2024, 05:26 AM
NDX
-
US500
-
QQQ
-
NQZ24
-
QYLD
-
US2US10=RR
-

Stocks finished the day higher, embarrassingly invalidating the 2b top pattern I thought had formed yesterday. It was a somewhat questionable move higher, with most gains occurring overnight during a low-volume, low-liquidity session.

Once regular trading resumed, the gains were minimal, with the market only advancing by 13 basis points. SPX Chart

QYLD Options Sell-Off, Steepening Yield Curve Pose Test for Nasdaq 100 Bulls

Yesterday, the QYLD ETF had to buy back the 19,450 strike price Nasdaq 100 calls that expire today. The day before yesterday, they closed at $110.30 per contract, but yesterday they closed at just about $400.

So the Notional delta went from around $4 billion yesterday to $8 billion. Imagine creating $4 billion in notional value out of thin air overnight.NDX Calls Chart

Anyway, as usual, the option contracts were bought back around 2 p.m., which continued for the rest of the afternoon.Option Contracts

It does seem odd that in the 930 minutes between 6 PM last night and yesterday’s 9:30 AM opening, NASDAQ futures rose 2.14% on just 146k contracts, but during the 7 hours between 9:30 AM and 4:30 PM, with 415k contracts traded, the futures only rose by nine basis points.

Nasdaq Futures Chart

But today, the QYLD ETF is set to sell about $4 to $5 billion in notional NDX options, probably starting around lunchtime.

So, should the futures market players be eager to get a head start the NASDAQ futures might need to drop overnight.

Yield Curve Continues to Steepen

The 10/2 yield curve continued to steepen yesterday, closing up five basis points to around 14 basis points.

Historically, as in going back to May 2023, at the start of the AI revolution, when the yield curve is flat or inverting, the Nasdaq 100 (QQQ) tends to rise, whereas when the yield curve is steepening, the QQQ usually moves lower.

Therefore, based on this pattern, one would not have expected the QQQ to rally yesterday or to continue to rally if the curve steepening continues.US10Y-US02Y-Daily Chart

S&P 500: Gap Pattern Signals Weakness Ahead

In theory, the S&P 500 formed a wall with a gap pattern at the open—similar to the pattern seen after the post-Labor Day drop. This suggests that yesterday’s rally may not be sustainable, and the gap is likely to be filled, in theory of course.S&P 500 Chart

Quarterly OPEX Awaits

Let us not forget today is also quarterly OPEX, and we’ll find out if the market makers will let all those holders of 5,600 SPX calls make out on those options after trading for $42.70 on Wednesday, which closed yesterday at over $100.SPX Calls

Original Post

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.