'The Witch' Not Spooking Options Market

Today's triple-witching, the simultaneous expiration of futures options, index options and equity options contracts, has had very little impact on volatility in the options market.

Historically, "the witch" has caused an increase in volatility and higher volume in the overall market because the futures and options positions that are exercised require simultaneous buying and selling of the individual stocks that comprise an index. In recent years, less emphasis has been placed on the impact of triple-witching on volatility due to the fact that equity options and index options expire monthly rather than on a quarterly basis.

Volatility Index
Today	% Change
26.27	+0.27
Source: ILX

Bernie Schaeffer, chairman and chief executive of Schaeffer's Investment Research, believes that the effects of triple-witching are more visible during the week following expiration, considering the options actually expire on Saturday.

Nasdaq Volatility Index
Today	% Change
59.24	-0.37
Source: ILX

James Quinn, of Letco, the designated primary market maker in Cisco (CSCO) options at the Chicago Board Options Exchange, agreed that triple-witching hasn't had much of an effect today. He believes that much of today's activity was influenced more by the negative news coming out of the tech sector. Nortel Networks(NT) and JDS Uniphase(JDSU) both issued profit warnings for the current quarter in the last two days.

The put/call ratio climbed to 0.84 at midday, which is substantially higher than the historical daily average. A put gives the holder the right, but not the obligation, to sell the underlying stock at a set price, while a call gives the holder the right, but not the obligation, to buy the underlying stock at a set price.

In Cisco options, the June 17 1/2 puts traded nearly 20,000 contracts on open interest of 55,575. The premium, or cost, of those put options, was most recently listed at 75 cents ($75 per 100). Quinn characterized the activity in the 17 1/2 puts as being "fairly flat on the day." The June 20 puts traded over 22,000 contracts on open interest of 52,993 with the premium going for $3.10 ($310). Quinn could only speculate as to the logic behind this trade but said it was essentially a "closing trade," which perhaps was easier than exercising the options. A majority of today's activity consisted of investors closing out their positions, he said.

Cisco shares traded down 80 cents to $16.93 in recent trading.

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