S&P spike - when to sell and when to re-buy?

[Featsbeyond50]

The Longs The Shorts And The S&P Index Managers

 

[Sanny]

If the SP goes up massively on the 18th, some may put off buying pre the 21st. Peak could be post 21st.

I looked into charts for TWTR and FB inclusions trying to find a pattern. Peak volume is definitely on 18th. My takeaway on the price (and please look yourself and come back with your interpretations) was that the peak price might happen at the end of 18th, or on the next 2-3 trading days.

 

[ReddyLeaf]

Good point. Also, with the 18th being a Friday, how much buying will happen after hours that day, when most of us have no trading ability? Does this affect anyone’s strategy as to when to sell their options?

This is what I believe will happen as well. The MM will keep the SP at max pain to close to the 12/18 options. Then astronomical trading after hours to close things out. Huge gap up, then Monday opens and stays flat much of the day. Rinse and repeat. We’re all little fish.

 

[Buckminster]

Attached documents provide the necessary info on the Nasdaq Opening/Closing Cross.

The essential purpose seems to be that by placing large orders for open or close, one can
(1) access enough liquidity to be executed all at once rather than affecting the market price over the course of the day
(2) adjust your limit price during the preceding several minute window based on the subscription-only Net Order Imbalance Information stream.
(3) benefit from "Imbalance-Only Orders" whose express purpose is to add liquidity (presumably via MMs).

The "Opening and Closing Cross threshold" is 10%, meaning that the Cross is restricted to within 10% of the bid-ask midpoint. However, "the threshold range is dynamic; as the Nasdaq Best Bid and Offer (QBBO) changes, the threshold price range changes." My uneducated interpretation is that the SP can change an unlimited amount up until the QBBO stops changing, then it can only move another 10%.

Therefore, the 12/18 Closing Cross presents an enticing opportunity for both sides of the trade. As others are saying, front-runners could create a gap up just prior to close upon the initiation of the Net Order Imbalance Information stream at 3:50pm (we saw a similar movement on Friday), by entering LOC orders with a much higher ask. Index funds must then decide whether to 'get it over with' or wait until 12/21.

Did You Know? "Short selling is permitted during the Cross."

Wow - why did we not hear about this earlier?

Thought experiment:

1. ARK don't need to use this mechanism.
   1. Not sure it is in their interest to do so. By opting out, the spike would be higher.
   2. They can sell multiple days later
   3. Risk of SP drop though
2. Assuming ARK use it:
   1. They state they will sell 10% of their TSLA portfolio if SP hits $700. Is that how it works?
   2. Can they provide multiple sell points ahead of 4pm?
      1. Theoretically, if TSLA goes to infinity, ARK would need to sell 99.9% of their TSLA stock
   3. I don't see them being dynamic during those final minutes before close - does anyone else?
3. Presumably the number of shorted shares plus the number of options in play makes this way more complex than where this mechanism has been used previously
4. I am increasingly less bullish on a crazy spike now
   1. The benefit being that the SP on the 21st will at least be more sustainable

 

[Buckminster]

The closing price mechanism is quite simple: it adds up all the 'sell' orders with their associated 'ask' price, and all the 'buy' orders with their 'asks', then solves for the closing price that MAXIMIZES the number of shares traded (ie: Liquidity).

There is no attempt to fill all orders, just to fill the most orders possible. And this won't just happen on Dec 18. It already happened on Fri, Dec 4th (notice the $5/share price increase in that last 10 minutes of the session?)

This 'end-of-day' runup will almost certainly will happen again on Dec 11, Dec 18, Dec 24, and finally on Dec 31 (as benchmark funds position themselves to close their books for the end-of-year). These are the Options expiry Fridays (extra liquidity), but there's a Closing Auction every single day, so I expect to see these mini-runups more frequently as we approach the S&P 500 addition date of Mon, Dec 21st (which logically may have a very large Closing Auction)

TL;dr It's not just about the Dec 18 Closing Auction.

Cheers!

Many thanks - that make much more sense!

 

[Buckminster]

 

[Buckminster]

Thanks MXWing for sharing this doc!

In a potential case that there may be fewer shares available during the closing cross on 12/18 than are needed, the Nasdaq FAQ doc states that the imbalance shares count is reported in real time from 3:55-4PM.

View attachment 615316



I could be wrong, but I am guessing that if there was a large buy-side imbalance at 4PM on 12/18, that might translate into speculation that more buying is yet to come.

I wondered if we might have access to this real-time net order imbalance indicator, and was pleased to find that retail investors can subscribe for $15/month through data.nasdaq.com.

I wasn’t able to watch it report live this morning, but here’s what it shows from today’s opening cross.

View attachment 615318

Nasdaq also ranks the top 50 companies by imbalance and price variance, so perhaps in time we can see a bit of what’s normal vs. abnormal for our little company that could. (Today, after the opening cross, TSLA was 28th highest number of imbalance shares on the buy side)

I’m going to see if there’s anything I can learn, but thought I’d share the info for smarter minds here to pick apart.

Does anyone else find utility in knowing the imbalance at 4pm on 12/18? How might you use that info?

(Side Note: Site uses flash. Mac users on Catalina may need to access through Firefox, as Safari has disabled flash support.)

 

[BabyBull]

I am looking at the todays SP shootout and subsequent rise in IV and options price and thinking I have 5-7k waiting to buy some call options.

Are there any contracts still cheap enough to make some money? Dec 24 thru Jan15? Anybody buying any, appreciate a hint.

**Asking for a friend**

 

[Buckminster]

I am looking at the todays SP shootout and subsequent rise in IV and options price and thinking I have 5-7k waiting to buy some call options.

Are there any contracts still cheap enough to make some money? Dec 24 thru Jan15? Anybody buying any, appreciate a hint.

**Asking for a friend**

Dec 24, 640s are at $52. Or buy 2 700s at $30.

Not advice, I have safer June 21s with much lower strike.

 

[ammulder]

MM manipulations are far overblown. Read up on pin risk to understand better what some think is manipulation. I'm not saying here that there's never manipulation, but I think a lot of price movements often attributed to MM manipulation can be better explained by this pin risk.

So, let's say there's an options expiration day with a big lot expiring at $600 strike. if the stock is naturally at $602 or $598, I can understand how pin risk might end up with it circling the drain around $600 and closing just below or just above.

What's not clear to me is:

• If the stock is at $630 on Wednesday or Thursday, why does it gravitate down toward the $600 strike? If all option sellers are hedged, they should make the same money at $630 or if it goes up to $650 as if it goes down to $599.50, right?
• Why does the stock always seem to close as $599.49 instead of $600.49? Again, if sellers are hedged and the price action is caused by pinning, this small difference should not be meaningful, and I would have expected a more even distribution of slightly above/below closes.
• And if they're not hedged, didn't the premium from the original sale more than cover the difference between a $600.49 close and a $600 strike?

On the other hand, if this IS caused by manipulation:

• Why don't the manipulators adopt an option selling strategy to make money off rising stock price, instead of making money off flat/lower stock price? Don't they have to spend an awful lot of effort on controlling the stock price around option close? Couldn't they find a way to sit back and enjoy the show and profit off the seemingly-natural rise in price instead?

 

[hershey101]

Uh the more I think about it, the more I feel like there will be no post inclusion crash.
For the price to come down, you need increased supply. However after inclusion you will effectively have an additional 150-250m shares "locked up", or a 35% reduction in float.

So how will you get a crash? Unless everyone who's not benchmarked to the index liquidated their entire position? Even if folks liquidate 30% that's 30% of less than 2/3rds of the current float. And no one will be in a rush to do so, they can spread it out over days/weeks/months.

 

[adiggs]

Uh the more I think about it, the more I feel like there will be no post inclusion crash.
For the price to come down, you need increased supply. However after inclusion you will effectively have an additional 150-250m shares "locked up", or a 35% reduction in float.

So how will you get a crash? Unless everyone who's not benchmarked to the index liquidated their entire position? Even if folks liquidate 30% that's 30% of less than 2/3rds of the current float. And no one will be in a rush to do so, they can spread it out over days/weeks/months.

You'll get all of the front runners closing their positions. Such as me - I have some late December and January calls I've purchased - those will be closing and I won't be replacing those positions (I'll go back to "only" holding shares). Many retail doing this.

You'll get all of the hedge funds and actively traded funds that will stop holding their inclusion shares as well.


I don't have a % on these. My guess soon after the inclusion announcement was we'd run up a bunch and then return to ~500. Now I'm thinking $600. I wouldn't have any heartburn today with $700 as the new steady state (nearly 75% higher than inclusion day), but I really doubt $800.

We won't need everyone to liquidate - only the short term money that's here for the inclusion event, buying up every scrap of something that looks like a share, and then selling into or just after the inclusion rally.

I only expect new locked up shares to be more like 15%, with a lot of those non-index funds selling shares regularly all the way up in order to avoid internal concentration problems.

 

[euro2012]

Its going to be interesting watching this happen next week. There are a ton of calls waiting to be sold at a profit. My question is, once that selling starts, will it snowball the effect of all the buying that is to happen?

 

[SexyHippo]

Anyone find the pricing today 12/9 a bit strange? So the other day I bought some options for my brother when tsla was trading at 630 12/7, 680c $34 12/24. Today it was trading at $600 but the 680c 12/24 was still at around $41+
my thought is that most options call holder are Tesla diehards and wouldn’t sell knowing the share squeeze coming up.
Any input is valued
Thanks

 

[ammulder]

Anyone find the pricing today 12/9 a bit strange? So the other day I bought some options for my brother when tsla was trading at 630 12/7, 680c $34 12/24. Today it was trading at $600 but the 680c 12/24 was still at around $41+

Looks like the volatility (IV) is up more than enough to compensate for the lower stock price

 

[Buckminster]

Going into next week and beyond, be careful that a drop is not ahead of the ultimate spike:

More from @FrankSG on Twitter.

https://twitter.com/FrankPeelen/status/1337619063711776771

 

[pjferr]

My Wife are committed to being long time holders of shares. We are fortunate to hold all of our shares in tax sheltered accounts. I agree with the theory that all of this speculation leading up to the S&P inclusion and the subsequent forced buying by the close on Dec 18 is likely going to cause a temporary dip afterwards. I tend to agree that the higher the selling price potentially squeezes, the sharper the subsequent dip will be. I also agree with FactChecking that the S&P will likely try to do all or most of their buying in the Closing Cross next Week.....likely on Friday Dec 18 at 4pm.

http://www.nasdaqtrader.com/content/productsservices/trading/crosses/openclose_faqs.pdf

As my accounts are tax sheltered, I feel it's worth the calculated risk for me to sell at least 10 - 25% of my shares regardless of what the bid will be by Friday Dec 18 as long as the price is at least in the $600s. The assumption being there would still be a very good chance the price corrects 10 - 20 % and I can increase my share count by buying back at a lower price but I would accept the possibility that if the share price continues to rise after inclusion I may be forced to buy my shares back at a higher price. I'm considering putting in limit sell orders in many tranches with increasing ask prices which would allow me to sell an increased percentage of my shares in the event of a significant squeeze occurs. I haven't even worked out the details yet but for example, lets say I do something like this:

In a scenario where the selling price is $680 late in the trading day on December 18:
Sell 25% tranche (25% of total shares now sold) at $680
Sell 10% tranche (35% of total shares now sold) at $710
Sell 10% tranche (45% of total shares now sold) at $740
Sell 10% tranche (55% of total shares now sold) at $785
Sell 10% tranche (65% of total shares now sold) at $830
Sell 10% tranche (75% of total shares now sold) at $875
Sell 10% tranche (85% of total shares now sold) at $915
Sell 15% tranche (100% of total shares now sold) at $965

Thoughts on this strategy?
Can anyone confirm that any standard Limit sell order for the day by a retail investor will be eligible to be executed in the 4pm closing cross as long as the ask falls within their calculated price threshold? It appears to be the case from what I've read in the above link but I'm typically a buy and hold investor and new to all of this.

 

[willow_hiller]

Thoughts on this strategy?

Good strategy, in my opinion. Tiering your limit orders like that will most likely guarantee some exposure to the price spike, no matter how high or low it goes. I cannot speak to whether limit orders will be filled during the 4 pm closing cross, but my guess is no, unless your accounts are authorized to trade after hours.

For now, I think my strategy is sitting on my hands. I asked my wife what price she would be comfortable selling our shares at, and she confidently said $2,000. I think she's a bigger bull than I am, haha.

 

[ReddyLeaf]

My Wife are committed to being long time holders of shares.....snip.... I'm considering putting in limit sell orders in many tranches with increasing ask prices which would allow me to sell an increased percentage of my shares in the event of a significant squeeze occurs. I haven't even worked out the details yet but for example, lets say I do something like this:

In a scenario where the selling price is $680 late in the trading day on December 18:
Sell 25% tranche (25% of total shares now sold) at $680
Sell 10% tranche (35% of total shares now sold) at $710
Sell 10% tranche (45% of total shares now sold) at $740
Sell 10% tranche (55% of total shares now sold) at $785
Sell 10% tranche (65% of total shares now sold) at $830
Sell 10% tranche (75% of total shares now sold) at $875
Sell 10% tranche (85% of total shares now sold) at $915
Sell 15% tranche (100% of total shares now sold) at $965

Thoughts on this strategy?

Hmmm, not a bad idea. I like the tiered sales. Here are my thoughts:
TSLA S&P SP Prediction - Conducted Dec-12th weekend
If you are long term holders, then why sell at all? I understand the idea of cashing some out, especially if you need the money, but those numbers seem a bit low, especially if you understand that Tesla is growing at nearly 50% yoy. At that rate, we might easily see $900-1000 in 2021, $1200-1400 in 2022, $1600-1800 in 2023, $2000-2500 in 2024. So, what company is a better investment? Please let me know because I would like to investigate it (as long as it’s in greentech).

 

[adiggs]

I'm learning many things from this inclusion event and my purchase of call options. The next time (which may be never) when I purchase call options, the changes I'll make next time:
- Use an expiration that is approximately 1 month (instead of 1 week) beyond the event. That additional time shields me from the ravages of short term time decay. In the current event, my Jan calls are doing much better - even at strikes that are going red for 12/18 or 12/24 expiration.
- Focus my big positions (and maybe all of them) on fewer contracts, with a much closer strike. My 800 and 900 strike calls are creeping along, and in one case, represent a losing position. Meanwhile, the 500's and 600's I got early on (and even later) are all doing very nicely, with a couple of those positions over 10x gain.
- Contracts that go ITM are a lot easier to hold as long as I think there is more room to run. Especially when they get deep enough ITM that time value gets really low. One of my early positions, a 500 strike, had it's time value drop below $1 as the option value was over $80 (basically, $80 ITM). It was really easy to hold that one to the day or two before expiration based on where I thought it would be going over that last day or two.

(NOT investment advice - but possibly helpful to others).