Thoughts on Options Expiration Part I

There is a saying "Sell in May and Go Away". The problem is, so far anyways, traders have not gone away in May and further more, no one is selling.

This week ending May 18, 2007, options expires. We can expect volatility and some zaney action as always, but a thought has crossed my mind that might make this options expiration quite interesting.

On the QQQQ, there is significant amounts of May out of the money puts in relation to call volume which is astounding. Which suggest that many traders are betting big that May correction commensurate with last year's magnitude will happen again this year.


For example, QQQQ is currently trading since last Friday's closing price of $46.78.

Look at out of the money puts for May 07, expiring in May 18, 2007 Friday.

Strike Volume Open Interest
42.00 4 170,333
43.00 10,692 166,336
44.00 937 210,462
45.00 6,263 246,584
46.00 54,536 218,668
47.00 46,087 127,052
48.00 10,471 30,368 *** denotes in the money or at the money puts ***

The puts represent over 1.835 times the call open interest.

So where am I going with this? If the CPI numbers continue to point towards moderating inflation and weakness, the market will continue this rally and the general consensus that the markets will sell off in May will be refuted. There may be a strong rally based on short covering and positioning for May 07 options expiration. I chose QQQQ because it is highly correlated to market psychology.

Consider the weekly chart of QQQQ



What this tells you is that there has been quiet accumulation of QQQQ over the past 5 to 6 weeks and QQQQ has broken through the near term resistance and has found support above it. The volume on accumulation side has increased slightly but nothing really to write home about. The momentum indicator also is showing a slight break to the upside and there really is nothing weak about this chart suggesting that perhaps there won't be a May sell off, which I believe to be true.

Long QQQQ.

CROX weekly chart




On Crox, there exists two separate trend lines. The longer term trend line and the shorter term trend line. The longer trend line shows that last week, Crox managed to finish up above that line, which is long term bullish. If Crox can continue to stay above that line, we can see some significant movement to the upside. On the daily chart, Crox has formed a bullish pennant formation, and these formation usually resolve to violent upside movement. I would stay long this stock despite significant run up in the stock price. Additionally, the options expiration week may see some strong upside movement if CPI number holds up to the bullish side.

Long CROX.

Weekly Chart of AMZN



Amazon has formed a high tight formation in addition to three weeks tight formation all of which are bullish. These chart patterns have shown to precede violent upside price movements. The down day volume is light and the price action is tight and in the upper range of the daily price range. Additionally, momentum is clearly in Amazon's favor. Again, this is a risky chart pattern but one that can pay off huge on the risk to reward ratio.

Long AMZN.

Google Weekly Chart



Google is frustrating and an anomoly. It really has been trading within a range between $660 and $670 range since reporting stellar earnings last quarter. It continues to digest the Doubleclick.com acquisition, which appears to be weighing on the stock price. I have wrote in my prior blog that Google deserves a higher multiple of 40X earnings. I still believe that. The chart is showing some interesting bullish sign. Google has formed a double bottom base with a handle and sell side volume and the overall volume in the stock is declining, which is very bullish. Also, google has formed a cup base on the second leg of the "W" base and is trying to finish the right side of the handle. Momentum is flat but appears to be trying to resolve to the upside. I believe the ideal buy point would be $492, which would give the best risk to reward ratio.

But, if the upside volume kicks in, Google can run to prior resistance of $513, which is the point of double top formation. I believe this will be the resistance point leading to the next quarterly earning. I am keeping my out for a call play probably for October 07. But patience is key as we are still trying to resolve some key issues with law suits and other challenges on Google. But I would not bet against Google.

I will discuss Target on my next blog.