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.
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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.