Options Expiration - Triple Witching Explained - video Dailymotion

Benzinga

CC Lagator, Co-Founder at Options AI, joined us on Benzinga's Premarket Prep to discuss triple witching day and explain what it is and how a trader could approach it.

Transcript

00:00We love having you on Options Exploration Day

00:03because this is in your wheelhouse here.

00:06And we know there is violent moves related to options,

00:10sometimes on these triple witch, call a quadruple witch,

00:13whatever you want.

00:13Some people will absolutely refuse, like Joel,

00:15to call a quadruple witch, but we call it triple witch.

00:18I mean, one, just maybe just explain, you know,

00:22what exactly triple witching is to our audience

00:24who haven't heard it.

00:25We titled the show Witching Day,

00:26so maybe it'll take a chance where our options expert

00:28can explain that a little bit.

00:30And then two, explain how maybe you approach

00:32a day like this.

00:34Yeah, yeah, so triple witching,

00:36I always refer to it as triple witching.

00:37That's what it used to be called.

00:39They tried to make quad witching a thing,

00:41but the fourth product isn't very popular, right?

00:44It was single stock futures, right?

00:46Yes.

00:47So basically what it refers to is, you know,

00:51happens four times a year where a bunch of the expirations

00:54and settlements all happen on the same day, right?

00:57And they tend to be that day itself.

01:01You know, the witching term comes from like

01:03kind of the weirdness you see, right?

01:05And you mentioned it earlier, Dennis,

01:07like the open is weird.

01:09You might see some like imbalances

01:11that you wouldn't have seen on a normal day on the open.

01:14And then you have this kind of, you know,

01:17the unwind starts a couple of days before,

01:20but it really accelerates into the close.

01:23And that's a lot of traders and big hedge funds

01:26and, you know, mutual funds rolling options positions

01:29and things until the next month.

01:31And you see a bunch of weirdness.

01:33You see whatever environment in the options backdrop

01:37that existed that week starts to switch over

01:41and you get a completely new one next week, right?

01:45And then I think on top of that, isn't there,

01:46I think there's an S&P rebalance, you know, at the close.

01:50So, you know, you see that after hours,

01:53that 15 minutes can be really weird at the close.

01:56And then of course that last hour is very weird.

02:00So, you know, as a trader, you have to be careful

02:04or maybe even like the way you said it earlier, Dennis,

02:06is you look for some opportunities on the open

02:08or you look for some weirdness into the close

02:11where you might not have seen that otherwise.

02:14But from a bigger picture, kind of, you know,

02:17looking ahead the next couple of weeks,

02:19looking into your end,

02:21the bigger news story with a big expiration like this,

02:25and this one's massive.

02:27And it's one of the biggest you will see,

02:30basically to put it into kind of the backdrop of options

02:35in the market terms,

02:36about a third of the options positions that exist

02:40and the effect of those options positions

02:43goes away into Monday morning, right?

02:46So, you know, that backdrop changes Monday morning

02:51and next week historically is a terrible week

02:55going back decades.

02:57And the week after September expiration

03:00and that triple quad witching expiration,

03:03I think it's only been up a handful of times

03:06in the last, you know, like 30 years or something like that.

03:10So it's historically, you know,

03:13we always talk about September and October

03:15being historically weak.

03:16A lot of it has to do with this.

03:20And, you know, I could go on forever about this,

03:23but if you think about summer trading

03:26and summer volatility and low market volatility,

03:29we of course saw August volatility,

03:31but people start to position ahead of time

03:35and they look out to like September options

03:37and October options.

03:39And this year you throw on an election

03:41into that mix too, right?

03:43So people start to position for potential volatility

03:45into the fall.

03:48On top of that this week,

03:49we had a FOMC meeting right into this expiration.

03:54So you think about all of that action positioning

03:58into that FOMC meeting and into this expiration.

04:02And it even explains a little bit of the rally yesterday.

04:07I think I put something in the chat

04:09like remind me to talk about this a little bit

04:11because on that question on the rally yesterday,

04:15going into the FOMC meeting,

04:18so the way the options complex generally looks

04:22in the big ETFs and the indices and things

04:24is people buy puts lower than where the stock is trading,

04:28lower where the indices are trading

04:31and they sell calls above where the indices are trading.

04:34It's one giant moving collar generally, right?

04:37And a collar is if you wanted to collar a stock

04:41that you owned, you'd sell an upside call

04:42and you'd use the proceeds to buy a downside put, right?

04:47So imagine all of that with all that volatility

04:50we saw over the last month,

04:51going into this FOMC meeting where it was a coin flip

04:55what they were gonna do, right?

04:56Like it was 25, 50, like nobody really knew.

05:01Yeah.

05:02Imagine all of that positioning, okay.

05:04So now you get the initial reaction on the FOMC day,

05:07which was a little bit weak, but not anything horrible.

05:11Then the next morning we got higher, right?

05:14That is a lot of people saying,

05:16all right, we didn't get this panic sell-off

05:19on the FOMC meeting.

05:20I'm unwinding all of my protective puts

05:23and I'm gonna start rolling my upside calls out,

05:27maybe to the next expiration or anything like that.

05:29And so all of that backdrop in the options market

05:32and a lot of that rally yesterday

05:35is a lot of people just basically getting out

05:38of their protective positions into the FOMC.

05:41And that puts upward buying pressure on the market

05:45on a day like yesterday.

05:46It's like all those market makers, my old job,

05:49I'm getting, I'm having a bunch of people

05:51sell puts back to me, right?

05:54And they're buying the calls back that I was long, right?

05:58And so it's sort of like, it kind of puts all this

06:00like, you know, pressure, upward pressure

06:03on the market out of nowhere.

06:06So you're saying next week though,

06:07all that upward pressure out of nowhere is gone.

06:11So we start with a clear slate here.

06:13So that opens it up a little bit.

06:15Exactly.

06:16And that's generally why, you know, next week,

06:20again, that historical record is really a negative one.

06:24That's not necessarily what will happen.

06:26I think the way you just phrased it

06:27is the perfect way to phrase it.

06:28It just opens it up.

06:30We could see a bunch of people come in on Monday

06:34and be like, you know, I think we're gonna break out

06:38new highs and everything like that.

06:39And then the options resistance of all of those

06:42upside calls that everyone has sold,

06:45a third of them don't exist like they did after that.

06:49You know what I mean?

06:50So you could see the opposite.

06:51Now, generally opening it up in fall, you know,

06:56we've got an election coming up, all that stuff, right?

06:58And we're at all time highs.

07:01Like, you know, that generally historically

07:03could mean downward volatility,

07:05it's not guaranteed, it could mean upward volatility,

07:07but we're likely to see some volatility next week.

07:11And then to be honest, there's no real reason

07:14in sort of the VIX futures curve

07:17and the options complex in general

07:19is pretty much predicting not super high volatility

07:25because the VIX, you know, you can see it at 16 right now,

07:27it's not high, but the VIX futures have been bid up

07:31and options have been bid up into the election

07:35for months now, going back to the spring almost.

07:38So that kind of environment and that kind of backdrop

07:41is likely to continue where it might be two way volatility

07:45and it might be a really tradable market

07:47over the next, you know, month, month and a half.

Options Expiration - Triple Witching Explained

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