In This Article:
Traders watch the put-call ratio because it can provide insight into what's driving the market at a more technical level.
Simpler Trading VP of Options Danielle Shay notes that the put-call ratio "got extremely elevated" this week as short investors were forced to cover their positions. But now, as the week comes to a close, she observes that the ratio is "getting low again, which is not great if you're long." But there is an upside. Shay tells Yahoo Finance that the short covering pushed the Nasdaq Composite (^IXIC) through some technical resistance, which means "that the rally can continue even though a lot of the short sellers have covered."
Watch the video above to hear why Shay likes to trade the "Magnificent Seven" stocks and how you can play them heading into an expiration week.
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Stephanie Mikulich.
Time for the options playbook sponsored by Tastytrade. Joining us now Danielle Shay, Simpler Trading VP of options. Danielle, it's good to see you here. Um, so you have been looking at the put call ratio, um, how many puts are there to how many calls overall in the market as sort of an indicator of giving us some idea of the underlying technicals of the market. So what is it telling you right now?
Well, the most important thing this week was it got extremely elevated. Before we rallied about 1,000 points in the Nasdaq, we had the put call ratio up above .9. Generally you want to see it about 1.0 for us to see a decent short covering rally, but this time it was enough. And so when we hit the low, that's where we had that high put call ratio. Ever since then, every day this week, it's been going down and going down as traders are covering. So, you know, that helps with that upside pressure. At this point it's actually getting low again, which is not great if you're long. Uh now we're getting down into the .6 .7 range, which basically means that the shorts have covered. Uh but you know what's great about this rally is that that short covering rally has sent the Nasdaq high enough that we've broken through a lot of resistance. So what that means is that the rally can continue even though a lot of the short sellers have covered.
And Daniel, you point out you usually trade the Mag 7. How come, Danielle?
Well, you know, I love trading these stocks because they have weekly options, they have high liquidity in the options market, and they also have uh the great ability to trade them with spreads due to the high liquidity. So, you know, when I'm looking through my options chain, I can identify pretty clearly which strikes have a lot of high open interest and high volume and what you'll see with the Mag 7 in particular is that those stocks tend to land pretty close to where their high volume and open interest is on a Friday and that's especially true on a witching expiration and a monthly expiration which is coming up next week.
So then how should people think about positioning themselves going into that expiration week. You know, if you take one of these, one of these names in the Mag 7, for example, just as a as a test case.
Of course. So first of all, you need to determine direction, right? Because you can have high open interest both above and below the market. And so the first piece of that is looking at the trend of the market and saying, okay, which direction do we think these tickers are going into options expiration. Now, because, for example, we've broken through a lot of resistance this week and a lot of the Mag 7 have recovered up above resistance zones, I'm going to be betting on the long side. Now, could that change if it reverses earlier in the week? Yes, it could. Uh but for the most part, what I do is I look at the Mag 7, I look at the expected moves in the options chain. So for example, with Microsoft, you know, you're going to have about a $10 to $11 expected move. You're trading at about $430, um, you know, $440 is the next key psychological value that's also overlapped with another zone of resistance. And you have a lot of high open interest there in the options market. So $440 would be my next target and then a little bit higher is going to be 450. Now that's really the key psychological value, uh, but it's a little bit out of the range as to what Microsoft could hit next week. So typically in options, I'll use something that I call the easy target, which is going to be the lower price target, which would be 440, and then the extended price target, which would be 450 in case we get a greater than expected move.
And Danielle, are you trading Nvidia here as well?
Oh yes, I love trading Nvidia and I love the way that Nvidia has rallied off of the lows. Uh that is incredible, the strength that we've seen there. And I want to point out that we have a ton of high open interest at the $130 strike price in Nvidia. And so when you have that volume and open interest, it just tends to act as a magnet. So when you combine that with the fact that it's recovered incredibly well, it's broken through resistance, we have this nice uptrend, that means that 130 is going to be my next price target in the options market. So, you know, you can do something like a butterfly. I love butterflies because you can get into them for relatively cheap debit. Um you can also do call debit spreads. I prefer those over trading just straight long calls. I know a lot of options traders like long calls, but you know, when you have those high open interest targets, they're a great spot to throw a spread on.
