Two Best Trade Setups Heading Into This Friday's August Op-Ex

This Friday is the August op-ex (monthly option expiry) and it's the time of the month when we see a lot of positional changes due to large percentages of options coming off the board (i.e. expiring).

Since the big de-leveraging last week on the market open, SPY has bounced and recaptured a key support zone in 530-532 – a level we've been talking about heavily in the Benzinga Option School.

We're now floating above this zone, and as long as we're above it, we're remaining mildly bullish on SPY. However, while last week we've seen many tickers bounce, few have been willing to separate themselves from SPY, either showing more strength or weakness vs SPY.

If you look at the 1hr chart below, you can see many tickers are simply following SPY's lead (SPY = candles, QQQ = maroon line, NVDA = green line, Gold = blue line).

$SPY 1hr chart

If all of the above tickers are trading with SPY, then it becomes tricky to decide which tickers to be bullish on as many are not outperforming SPY.

So let's dig up the tickers that are doing much better (or far worse) than SPY. Those are the trades I'm always looking for, as they provide more opportunity on the same bullish or bearish move.

Let's take a look at two tickers I'm looking at for potential bullish or bearish trade setups…

Preferred Bearish Pick: $TSLA

If you look at the 1hr chart above, we see SPY in the candles, and $TSLA stock prices in the red line. You can see how SPY recovered its Sunday gap lower while $TSLA never recovered. This to me shows weakness or a lack of buying demand in $TSLA while other stocks have shown enough buying interest to recover the Sunday gap losses.

If I'm leaning bearish on stocks this week, $TSLA would be my preferred choice for getting bearish as it's showing the least bullish interest from large players and investors. I'm currently looking for mild corrective pullbacks to take a bearish position for the Sept op-ex.

Alternative Bearish Pick: $XOM

Also looking at the 1hr chart above, we can see how XOM didn't suffer as big a drop as SPY while also recovering its Sunday gap losses faster. It took less of a hit, and bounced back faster. This to me shows more interest or strength, and with geopolitical tensions rising in the Middle East (Israel/Iran conflict), the reasons for oil to go higher are in place.

We do think XOM is a bit rich at 119/120, which its struggled to get past, so we're looking for mild corrective pullbacks a few dollars lower to establish some bullish positions for the Sept op-ex.

Honorable Mention: QQQ

We think QQQ has more potential to rise/fall vs SPY because it's a bit more vulnerable. That's because AI and Big Tech stocks were the main bullish narrative (aside from rates and yields) before last week, so we've seen more positioning in AI, semiconductors, Big Tech than in many other sectors.

With NVDA earnings coming up on 8/28, we think the AI narrative will be really put to the test. If the earnings come out strong, we think AI, semiconductor, and Big Tech stocks will benefit, and likely start a new bullish run, perhaps for the fall.

But if NVDA's earnings come in under expectations, markets could be vulnerable to more losses as the main drivers of gains this year will likely start selling off.

It's because of this potential response that we think QQQ is better positioned for a strong move (up or down) after the litany of events in the pipeline (PPI, Jackson Hole, NVDA earnings, etc.). We also like QQQ's more ‘positionally' because it's not as close to its TCS (Top Call Strike) vs SPY (QQQ TCS = 485 vs SPY TCS = 550). This means there's more topside ‘available' if we get a bullish move, hence more reward for taking an OTM bullish play.

We'll share more of our trade ideas live with the Benzinga Option School & Trading Waves members this week. We hope to see you there.

Photo via Shutterstock.