For those of you whose French is as poor as mine, here is the subtitled translation: Remembrance of Things Past[i]. Having spent the first three days of this week at the Canadian Annual Derivatives Conference (CADC) in Montreal, I’ve been both a bit more nostalgic and trying to use my rudimentary French. This morning’s pre-opening flurry was a brief reminder that the influence of “triple-witching” expirations still can matter even if the overall effects might be relatively muted.
Indeed, with options expirations occurring daily, the relative importance of quarterly expirations has ebbed over time. Much of that has to do with what I like to call the compression of expiration cycles. As an industry, we started with quarterly expirations over 50 years ago, then over time added monthly, weekly, thrice-weekly, and eventually daily – aka 0DTE – expirations.
During my speaking session at the CADC[ii] I posed a question that has elicited blank stares from attendees at other industry conferences. This one was no exception:
Q: “When did the listed options market experience its first zero-dated option?”
A: “1973, the day that the first listed options expired.”
Indeed, every option becomes zero-dated upon its expiry. And the more one does something, the easier it gets. (That applies not only to expirations, but also with things like assembling Ikea furniture.)
Over time, traders have expressed a preference for trading ever-shorter dated options – over 50% of total options volume now occurs in options expiring in less than five days – meaning that the prior quarterly, monthly, and, in the case of key indices, even weekly expirations matter relatively less than they once did.
So why write about it today? We can thank (or blame) Fed governor Christopher Waller. Pre-market futures were meandering at lower levels when Governor Waller suggested that the Federal Reserve should consider cutting rates as early as July. Obviously, stocks liked that news item and rallied accordingly.
That’s when the expiration effect kicked in. There were over 530,000 contracts on the S&P 500 (SPX) 6,000 line that were expiring on this morning’s open. Because these are cash settled, any residual delta in those options disappears upon expiry. Hedgers who might be short those options need to cover their vanishing delta exposures, so there can be a rush to replace expiring delta with futures. (We explain this effect in greater detail here) Thus, we got a bit of an opening “whoosh” in SPX.
The opening rush abated, however. That might have been because more traders than usual were taking the day off after the Thursday holiday, or it might have been because there wasn’t much geopolitical news to move prices in either direction. As I write this, SPX is essentially dead flat for the week. But for a few brief moments this morning, “triple-witch” expiration moved markets. Thanks Mr. Waller.
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[i] Considering that my knowledge of Proust – the author of the book with the above title – is limited to a Monty Python sketch, I apologize if I’ve missed the point of the novel completely.
[ii] CADC was the site of my first ever speaking engagement over a decade ago. Back then I was strictly a proprietary trader with no expectation of ever becoming a talking head. It was a real treat being able to address the conference once again.
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“Frogs and snails and puppy dog tails and dirty sluts in plenty, smell sweeter than roses to young mans noses when the heart is one and twenty” M. Prost
Unless there is a context that we should know about, the actual translation is : In search of lost time.