Options Volume Is a Major Driver Of Today's Market

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If you have been trading the S&P futures for more than 20 years, you know there used to be the “futures are overbought or oversold.” You also know that it could be exploited, but as time has gone by, it's not the futures that are moving the markets anymore — it's the options markets. 

The CME's S&P 500 options, the CBOE’s SPX, SPY, VIX options, the NASDAQ, NY Stock Exchange (AMEX), International Securities Exchange (ISE), UREX, Boston Options Exchange (BOX), Miami International Securities Exchange (MIAX), the Pacific Exchange — you get the idea. 

And this doesn't include all the big Wall Street firms, prop trading desks and dark pools. Options volume continues to hit new record after new record, and this has had big implications for the overall market. According to the Options Clearing Corp, around 44 million options contracts changed hands on an average day in 2023, which has doubled the volume from five years ago. 

Now, many option markets trade almost 24 hours a day. As I have said many times, these are not our father's markets or charts. 

While some investors think of options as a way to limit their risk, the big uptick in volume is anything but. It's about taking on larger risks for larger payouts. Instead of the standard “buy and hold,” the public and institutional trade is now taking on much larger size and using smaller time frames, like the zero-days-to-expiration or (0DTE) options, which now represent close to 50% of overall option-trading volumes. 

While we have not seen some of the crazy moves from the 0DTE recently, it was not long ago — and of all the firms to complain — Goldman Sachs complained about the late-day volatility tied to the 0DTE options. I guess this is nothing new, but after a quiet period in the S&P the next time the futures explode it may be a good idea to learn as much as you can and that is why MrTopStep is a partner with SpotGamma, which says trading in contracts that expire in five or fewer days touched a record 59% in October and has remained elevated. 

Many traders are increasingly holding positions for hours, or even minutes, in a bid to rapidly juice their returns. The one-day trades, known by the hashtag #0dte, have gone viral, with tens of thousands of mentions swirling online that have helped draw even more people in. So next time the ES explodes higher, remember where the buying is coming from. 

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MiM and Daily Recap

ES 15-min recap

The ES made a low on Globex at 4898.50, traded up to 4928.75 at 8:55 am, and opened Friday's regular session at 4818.00. After the open, the ES traded 4914.25, rallied up to 4825.25 at 9:36 and then traded down to the VWAP at 4917.00, back-and-filled in a 4 to 5-point range just above and just below the VWAP, and made a new low at 4912.75 10:07. At 10:24 several buy imbalances started showing up in both the ES and the NQ and the ES traded up to 4934.25 at 1:01. 

After the high, the ES slowly traded down to 4907.50 at 1:55, did a small upward back-and-fill trading up to 4923.75 at 2:54 as the early imbalance showed $705 million to buy and sold off down to 4912.75 at 3:42. The ES traded 4916.50 as the 3:50 cash imbalance showed $233 million to buy and traded 4916.25 on the 4:00 cash close and settled at 4912.75 on the 5:00 futures close, down 10.50 points on the day or -0.21%. NQ was down 129.75, or -0.74%, the RTY closed down 0.90 points or -0.05%, while the YM closed  up 35 points or +0.09%.

In the end, the ES maintained its 4895 to 4935 trading range, but the chop only got worse as the week rolled on. In terms of the ES's overall tone, it didn't act that great. Regarding the ES's overall trade, 250k traded on Globex and 1 million traded on the day session for a total of 1.250 million contracts traded.

Technical Edge

  • NYSE Breadth: 63% Upside Volume

  • Nasdaq Breadth: 56% Upside Volume

  • Advance/Decline: 57% Advance

  • VIX: ~14

S&P 500 — ES Futures

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Guest Post — Handelstats

Looking ahead, at interest rates. Although I haven't done anywhere near the quantitative work in the bonds and notes as I have in the indices. I always watch them and keep ichimoku charts on them.

In this first chart, the ZN has remained above the December 13 low made after the Fed meeting and Powell's lack of hawkish comments rallied the notes and bonds, helping propel stocks higher. The subsequent decline in the notes has put a damper on the Bullishness of the ichimoku chart. A bear cross with the Tenkan crossing under the Kijun, the Chikou span moving under price, and price moving into the cloud. From a timing perspective as long as the market moves sideways and not lower it will remain what I see now as neutral Bullish until the first part of March.

If the notes do start moving lower we could have a good idea about direction the week of 2-5-2024. Trading higher has much to overcome now too. Notes need to stay above 110'16.

/ZN

Economic Calendar

Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!

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