As S&P 500 Retries 3,000, Option Sellers May Gird for Battle

(Bloomberg) -- The S&P 500 could struggle to climb above 3,000 amid a defense by those who have sold options with strikes at or above that level.

Schaeffer’s Investment Research is watching the setup of bullish call options on the SPDR S&P 500 ETF Trust, with a focus particularly on that nearby round number. The stock benchmark briefly retook 3,000 on Tuesday before paring gains, and was up 1.1% to 2,998.07 as of 11:15 a.m. in New York. The ETF, ticker SPY, also advanced 1.1% to $299.15.

“Big call open interest resides at the 300 strike, equivalent to SPX 3,000, and premium sellers will work to defend a move above this level,” Todd Salamone, senior vice president of research at Schaeffer’s, wrote in a note Monday. “This was evident late Friday, as the SPX sold off in the last 15 minutes of trading after sniffing the 3,000 area. Most of this open interest was bought to open at the 300 strike.”

If sellers are unable to defend the $300 strike on SPY, there’s potential for hedging-related purchases that send the ETF to $305, equal to S&P 500 at 3,050, Salamone wrote.

He noted that the area of “maximum pain” for option buyers on the SPY -- where the largest number of put and call options expire worthless -- is at $293.

Salamone sees low corporate-profit expectations into earnings season and an increase in short interest on S&P 500 members in the past few months as potentially supportive of U.S. stocks moving forward.

“With a relatively low bar set with respect to earnings, and more clarity on China-U.S. trade, an unwinding of the six-month build in short interest could be what is needed to push the SPX above the top of its range,” he wrote.

--With assistance from Rita Nazareth.

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To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Ravil Shirodkar, Randall Jensen

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