Investors may find Friday’s “triple witching” options expiration to be a significant event, and not just in Eastwick.
Investors’ attention is currently focused on what is expected to be the most chaotic Federal Reserve meeting in years. However, there are other potentially market-moving events scheduled for this week.
On Wednesday, hours before Fed Chair Jerome Powell takes the podium at the Marriner S. Eccles Building, volatility traders will be busy with the expiration of futures and options associated with the Cboe Volatility Index VIX, also referred to as the VIX or Wall Street’s “fear gauge.” In the most recent monthly “Vix-piration” event, they are scheduled to expire on Wednesday before the opening bell.
The most recent “triple witching,” in which futures contracts and options tied to stock expire on the same day, occurs on Friday. Options contracts linked to well-known ETFs, individual stocks, and indexes such as the S&P 500 SPX will either expire worthless or be exercised.
According to Brent Kochuba, founder of SpotGamma, a company that provides options-market data and analytics, triple-witching events have historically been linked to significant market turning times.
According to SpotGamma data provided to MarketWatch, options linked to around $6.3 trillion worth of stocks and equity indexes are scheduled to expire. Kochuba told MarketWatch that the September expiration should rank among the top three triple-witching occurrences ever.
The fact that Friday’s triple witching occurs so soon after the Fed meeting on Wednesday may assist to amplify any volatility that emerges from the meeting, particularly if Powell disappoints investors. According to CME Group data, futures markets are pricing in three interest rate reductions from the central bank before the year ends, and a decrease on Wednesday is viewed as a near-certainty.
According to Matt and Mike Thompson, co-portfolio managers at Little Harbor Advisors, “when there is a large expiration, it tends to free up the market to move a little bit more naturally,” they told MarketWatch.
Later this month, when the so-called “JPMorgan collar” rolls off, there will be another significant options-expiration event. According to FactSet data, the “JPM collar” is most closely linked to the JPMorgan Hedged Equity Fund JHEQX, a mutual fund with assets over $20 billion. As part of their collar strategy, the fund sold S&P 500 quarterly call option contracts, with a strike of 6,505. If there is some weakness after the Fed meeting, that might offer significant support for markets, Kochuba added. Selling call options to offset the cost of purchasing puts, which provide some downside protection, is known as a collar strategy.
According to Kochuba, recent rumblings in the options market indicate that the market may be preparing for a significant move in either direction. But in the end, the Fed will most likely determine what occurs.
Kochuba said that this week has seen a little increase in implied volatility associated with both longer-dated and short-dated zero day-to-expiration contracts. FactSet data shows that the VIX ended Tuesday at 16.29. This occurs throughout the past few weeks, when the daily trading volume in so-called zero-day options has been at or close to records.
The Thompsons also noted that the ICE BofAML MOVE Index, which measures implied volatility in the Treasury market, recently hit its lowest level in around four years.
“We’re at all-time highs, it’s been quite a while since we’ve had a 2% move down, but call prices aren’t all that rich,” Kochuba stated to MarketWatch. “I think this could be a short-term signal that volatility is due to jump.”
According to Dow Jones Market Data, U.S. stocks ended Tuesday slightly lower, with the Nasdaq Composite COMP ending a six-day winning streak. Additionally declining were the Dow Jones Industrial Average (DJIA) and the S&P 500.
