Where Is S&P 500 Headed In July? Options Market Offers Subtle Clues

The S&P 500 closed higher on Thursday as banks passed the Fed stress test and strong economic data fueled expectations of extended rate hikes. The index ended at 4,396.44, up 0.45%.

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Here’s a breakdown of the options market outlook for the index:

1. Resistance: Open interest accumulation at the 4,400 Call strike suggests it could act as a significant resistance level for the month. However, it doesn’t mean the index will strictly stay below 4,400. Traders anticipate that even if there’s a rally, the index is unlikely to stay above that level by the third week of July.
2. Support: Monthly options data reveals significant open interest accumulation at the 4,400 Put strike. This implies two expectations among market participants. First, some anticipate the index to remain relatively stable with low volatility until the third week, coinciding with the scheduled Fed meeting. In this scenario, professional traders may have entered short straddle positions, involving shorting both calls and puts at the same strike. Others who prefer hedging may have entered a short strangle strategy, combining short straddle positions with the purchase of out-of-the-money options on both legs. The second possibility suggests a potential tug-of-war between bulls and bears, with a clearer outlook emerging over time. This could lead to significant unwinding of positions on one of the legs.

While open interest figures provide insights into support and resistance levels, significant price movements or macro events can shift open interest levels.

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