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Join Larry McMillan as he discusses the current state of the stock market on May 22, 2023.
Thomas Peterffy is well-know for founding the computerized trading firm Timber Hill and also for founding Interactive Brokers. Thomas recently was the Keynote Speaker at the May 2023 SIFMA meeting to commemorate the 50th anniversary of listed option trading. SIFMA is the Securities Industry and Financial Markets Association; it was formed from the merger of the Bond Market Association and the Securities Industry Association, in 2006. This is a copy of the speech that Thomas gave, about 50 years of listed option trading, through his personal experiences.
Once the market perceived that the "debt ceiling crisis" might not be a crisis after all, it began to rise again. $SPX is right at the top of the trading range and is attempting to break out. Those are very positive things. But before we jump on board with both feet, remember that 1) politicians can't be trusted, and 2) there have been some rather severe false upside breakouts by $SPX in the last couple of years.
Stocks have hunkered down into an even narrower trading range this week, although intraday volatility has seen some large moves. As a result, $SPX is still in the confines of the 4050-4200 trading range in the short term, and from a longer-term perspective is in the trading range it's been in all year: 3760-3850 on the downside to 4200 on the upside.
Here’s a chart that we haven’t revisited in a while. It shows the composite value of $VIX (actually, $VXO in the early years) from 1989 through 2022. In reality, the CBOE backdated the original $VIX data to 1986, but including 1987 in the chart just distorts things too much. As it is, the inclusion of the March 2020 $VIX explosion has changed the chart a little.
I have known Paul Stevens since the 1970’s. He has had a long a successful career in the options arena. Paul (an English major in college) was kind enough to write up some memories, and then we talked for a while, adding in more of his experiences.
Everyone seems enamored with zero day to expiration (0DTE) options. Trading volume has been huge, and no one exactly seems to know why. The conventional wisdom is that market makers are sellers of these same-day options, while institutional and retail traders are buyers. There have been several articles written on that subject, and certain podcasts have dealt with it as well. The reason that “institutional” and “retail” are lumped together is that institutional traders using bot trading algorithms are easily able to split large orders into many small pieces, to disguise their real size and to make it look like retail. However, since hundreds of thousands of contracts are trading in a single day, there is almost certain to be a large institutional presence among that volume. Regardless, we want to see for ourselves what is going on.
Stocks are still stuck in a trading range. The wider range has its lows in the 3760-3850 area (the lows of both December and March). The narrower, more recent range has its lows in the 4050-4070 area. That was just touched yesterday, but appears to be holding at this time. On the upside, resistance at 4200 is strong and has a lid on this market for now. Above there, the highs of last August at 4300 make for further resistance.
Shelly Natenberg is best-known as author of the book, Option Volatility and Pricing. He is respected as both a trader and an educator in the option business.
