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Option Expiration Magnets For Gold And Crude Oil 9/29/17

|About: SPDR Gold Trust ETF (GLD), USO

Introduction

I have begun to publish the OPEX magnet information in the morning in my Seeking Alpha marketplace service.  These values have been calculated on yesterday’s settlement prices and option open interest.

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Gold OPEX Magnet

As I crunched the numbers for the gold (GLD) OPEX magnet this morning, it occurred to me that the magnet is in balance right at the end of the 3rd quarter.  A conspiracy theorist might point out that the sharp re-balancing between the futures price and the OPEX magnet in the past week has enabled the market-making traders to make or save their 3 rd quarter bonuses.  The gold OPEX magnet is decidedly in balance with the futures price.

Crude Oil OPEX Magnets

I am torn between rating the crude oil (USO) OPEX magnet “neutral” and “cautionary.”  On the one hand, the OPEX magnet is below the futures price.  On the other hand, it is still many days before option expiration, and I have seen 7% divergence between the crude oil futures price and OPEX magnet since I began calculating these numbers in June.  Finally, over the past week, the OPEX magnet has been increasing, largely due to many more puts being added to open interest than calls.  The market makers sold a lot of puts yesterday when the price dropped sharply into the close.

Understanding the OPEX Magnets

The option expiration (“OPEX”) price magnets show the clearing price at which the market makers can optimize their profits in the option market.  For an introduction to the philosophy behind OPEX magnets, please read my introductory article.  The OPEX magnet calculation is one data point of many that I consider in analyzing a market.

Notes on the OPEX Magnet Table:

  • The date in the first column is the most recent settlement date of the futures and options market that correspond to the “Future Settlement” price.
  • The dates in columns 2, 3, and 4 are the next three option expiration dates.  I include more than one OPEX date because market participants often hedge their option positions in future months, and I want to capture those effects. The OPEX magnet calculations are cumulative.  
  • The put and call options open interest in the first month are included in the calculation of the OPEX magnet in the second month, and so on.
  • The Magnet Strength is a calculation that measures the 2-standard deviation total Value at Risk ("VaR") change of the options versus the 2-standard deviation value change in the underlying futures contract for the given expiration date.  A result of 100% means that the VaR of the options market is equal to the VaR in the underlying futures market.
  • The fifth column, “Prior Week Open Interest” shows how the options open interest and OPEX magnet price changes over time.   A high put/call ratio usually implies that the OPEX magnet price has increased over the past week, for example.

The OPEX magnet is a big improvement upon the traditional put/call ratio analysis because the put/call ratio does not inform the analyst whether the purchased puts and calls were in- or out-of the money.  The OPEX magnet calculates the optimal price at which the market makers can earn tens of millions of dollars.

Disclaimer

This article was written for information purposes, and is not a recommendation to buy or sell any securities.  I never intend to provide personal financial advice in my newsletters.  All my articles are subject to the disclaimer found here.