Near The Money

Last Updated: 8 Oct 2024

In this blog series, we track options for the market index ETF (SPY) to predict future market moves, using our option pricing tool as a showcase.

A bullish market makes higher highs and higher lows, while a bearish market makes lower highs and lower lows. A sideways market, on the other hand, is unable to make new highs or new lows. Therefore, we can attempt to predict near-term market moves by evaluating the market’s ability to make a new high or a new low. We do this by studying options, as the options market often leads the stock market!

We consider the nearest major high and low of the index (SPY) based on weekly data and use our option pricing model to analyze the next available monthly options corresponding to these levels. This helps us determine whether the options momentum favors buying a call (upside potential), buying a put (downside potential), or neither.

Current SPY Major High ~ 575

Current SPY Major Low ~ 540

Next Option Expiry: 15 Nov 2024

Momentum remains in favor of buying the call, indicating upside potential, though it is expected to weaken. The call option price is currently at or near fair value, but we expect it to become cheaper for those betting on the upside. (Left Figure)

Meanwhile, momentum remains against buying the put, showing limited downside risk, and the option is becoming cheaper. If it approaches fair value, it will become a suitable choice for buying the put as a hedge. (Right Figure)

Based on this options analysis, we expect a weakening bullish market in the near term. We are comfortable holding the call option (and adding to it if it drops below fair value) and are interested in buying the put option if the price falls below fair value.

At key market junctures, we also provide more in-depth analysis by posting on our YouTube channel. Here’s the latest posted on 29 Sep 2024:

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