Any time that it behooves market makers to direct prices lower, I get nervous. So that means I get nervous as we approach the 3rd Friday of every calendar month (monthly options expiration day), especially if we've seen a nice advance leading up to it. If you've followed my work, you know that the stock market has a long history of struggling as we move into options expiration and the week following. Since 1950, the S&P 500's annualized return by calendar day of the month is as follows:
The S&P 500 has averaged gaining 9% per year since 1950. If every calendar day was created equal, we'd see annualized returns of roughly 9% for every calendar day. But note that every day from the 19th through the 25th falls short of that 9% return.
Historically, the S&P 500 tends to move higher from the 11th through the 18th of calendar months. That tends to result in a number of stocks with net in-the-money call premium. You really want to be careful that you don't buy overbought stocks whose options activity suggest a pullback is likely.
We have a Max Pain event every month for our members to discuss this very thing. In December's event, we featured Moderna (MRNA) and Occidental Petroleum (OXY) as two stocks that were subject to the potential of short-term price manipulation relating to net in-the-money call premium. On Tuesday, December 15th (three days before options expired), we held our event and MRNA and OXY traded at 146.48 and 19.84, respectively. Both stocks struggled into the Friday expiry and into the following week. Here are the two charts:
The thick black directional arrows show where both stocks were on Tuesday, December 15th at the close. The red-dotted directional lines show what happened subsequent to that date. There was nothing in particular technically that was worrisome. It all came down to the financial incentive that market makers had to drive prices lower in the near-term, which they were quite successful in doing. Without this knowledge, however, many unsuspecting investors were buying these stocks or, worse yet, buying call options. That's a recipe for disaster and it certainly didn't work out for those going long these two stocks in December.
Because of the sizable market advance that we've seen into January 2021, there are plenty of vulnerable stocks heading into this Friday's option expiry and I plan to cover a few of them in Tuesday's "January Max Pain" event. If you'd like to join me and you're not currently a member of EarningsBeats.com, you can CLICK HERE to sign up for a no cost 30-day trial.