“The S&P 500 has seen another mid-month ranging ahead of Friday’s options expiry“—Paul Ebeling
The expiry of stock and index options this time is part of a quarterly event known as “triple witching,” where futures on indexes also expire.
We estimate that about $3.4-T of equity options are set to mature Friday, including $720-B of single stock options that is expected to be the most for any September expiration ever.
Heading into the event, option traders paid near record-high prices for put contracts. Calls for a correction in stocks are multiplying amid the spread of the Covid delta variant, a looming tax hike and the Fed’s plan to roll back monetary stimulus.
But, the S&P 500 has held above its Key trend line: the 50-Day MA. The benchmark closed Thursday at 4,473.75.
The Quarterly expiration usually coincides with a rebalancing of benchmarks such as the S&P 500, sparking single-day volumes that rank among the highest of the yr.
According to an estimate from a senior index analyst at S&P Dow Jones Indices, the rebalance in the index alone could force $55-B of stock trades.
So, a busy week is likely to get even busier. The amount of shares changing hands on exchanges Topped 10-B for 4 days running through Wednesday. That compared with an average of 9-B shares in August.
Over the past 2 wks, put options on the S&P 500 with less than a month to maturity accounted for about 15% of the total out-of-the-money put volumes, the most since the height of the VirusCasedemic chaos in Y 2020. Single-stock options have similarly shifted, with 71% of total volumes in short-dated maturities, expiring within 2 wks.
My work attributes the S&P 500’s recent low volatility to a condition where options dealers are “long gamma,” or going against the prevailing market trend. As, typically, options dealers need to hedge their positions by buying or selling the underlying stocks.
The Southside skew is extremely high in high short-dated tail hedge volumes. High Southside skew implies that investors may expect gamma to reverse in a further sell-off.
Many savvy traders do not trade in the 3 days prior to and the 3 day after options expirations
Have a prosperous day, Keep the Faith!