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Stock-market traders brace for ‘quadruple witching’
Published: Sept. 14, 2021 at 5:12 p.m. ET
William Watts
Options expirations blamed by some analysts
for bouts of midmonth volatility in 2021
The stock market is repeating a
pattern of midmonth stumbles some analysts tie to options expiration. That dynamic
could be amplified this week ahead of “quadruple witching,” the simultaneous
expiration Friday of individual stock options, stock-index options, stock-index
futures and single-stock futures.
Options are financial
instruments that give the holder the right but not the obligation to buy, in
the case of a call option, or sell, in the case of a put option, the underlying
asset at a set price by a certain time.
“Almost like clockwork, over
the past six months the S&P 500 has fallen in the week leading into OpEx,
so the risk is we see this flow repeat and come into play this week, which
could mean weakness into Friday’s expiry — although perhaps it’s all too
obvious now,” said Chris Weston, head of research at Pepperstone, in a Monday
note. OpEx is trader slang for options expiration.
One popular explanation of the
dynamic requires briefly translating some options lingo: Delta measures how
much an options price is expected to change for ever $1 move in the price of
the underlying asset. Gamma measures the speed of the change in an options
delta.
The Friday expiration “should
get some focus because the talk is market makers are long gamma, and this has
had the effect of reducing volatility,” Weston wrote. Effectively, market
makers who have sold options are taking positions in the underlying stocks or
other instruments to hedge their market exposure.
“When this gamma rolls off the
market, it typically means the index is free to move as it should, as market
makers have less position risk to hedge,” Weston said.
Bloomberg previously noted bouts of market weakness ahead
of the expiration of monthly stock options, which occurs on the third Friday of
the contract month. The report observed that some analysts had tied bouts of
weakness across equity markets in the days ahead of the monthly options
expirations in February, April, June, July and August.
Earlier: Blame options expiration, not politics, for
stock-market pullback, says top quant
Heading into Friday’s quadruple witching — a convergence that
occurs once every quarter and is typically associated with the potential for
increased volatility and high trading volume — stocks were stumbling again. The
S&P 500 SPX, -0.57% fell 0.6% on Tuesday, leaving
the large-cap benchmark down nearly 2% in the month to date. The S&P 500
has fallen in six of the last seven sessions, while the Dow Jones Industrial
Average DJIA, -0.84% has declined in nine of the
past 11 sessions.
Quadruple witching can make for
choppy trading because “so many things are coming off at once, and firms
unwinding positions versus each other and versus their stocks,” said J.J.
Kinahan, chief market strategist at TD Ameritrade, in a phone interview.
That activity, combined with a
lack of fresh trading catalysts, could continue to make for choppy price action
in coming sessions, he said.
While there was some immediate
reaction to a softer-than-expected inflation report Tuesday, the data didn’t
significantly change market expectations. A meeting of Federal Reserve policy
makers also appears unlikely to alter the status quo, and while a smattering of
companies are offering up results, the market is effectively in an earnings
lull before third-quarter reporting season gets under way next month, he said.
Kinahan, however, was less
convinced that monthly options expirations has been a significant market driver
in recent months. While the quarterly quadruple witching event is notable, the
popularity of weekly options may have dulled the impact of monthly expirations
somewhat, he said.
The Cboe Volatility Index VIX, +0.46%, a measure of
expected volatility in the S&P 500 over the coming 30 days, has struggled
to break above its long-term average near 20. But the gauge can likely stay in
a range between 16 and 20 for some time, Kinahan said.
“Back-and-forth choppiness
won’t end fully until we have a clearer picture on what the Fed is doing in
terms of timing” when it comes to scaling back its stimulus efforts, he said.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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