Investors who think today's triple expiration isn't having at least a bit of a negative effect on stock and index prices should think again.
Triple expiration -- or
triple-witching -- is the quarterly simultaneous expiration of futures, index options and equity options contracts. Considering how awfully the stock market has performed, you can bet there are a lot of
options that are going to expire
in-the-money. The traders who sold those put options are obligated to buy the underlying security if its price hits the options strike price. That makes them essentially long, so as a hedge, professionals will sell stock short so they're not too exposed to a declining stock.
But the appreciation of put options in this weak market is just one of the factors making a difference on this
triple-witching Friday. Among the hot-buttons investors are watching is the 600 level on the
, or OEX. It's become an important level because there is sizable open interest in put options below that strike price. Early this afternoon, the OEX fell 4.56 to 596.15.
Market makers and traders long those in-the-money puts have hedged themselves by buying stocks or
futures contracts, so they have to sell stock or futures to raise cash in case the options are exercised because OEX options are cash settled. Also they sell to cover themselves if those who bought the puts just sell them back to the market place to close their positions at a profit.
Open interest in the OEX March 590 puts was 3,937 coming into today, however, by midday today more than 9,200 of the contracts traded. The puts fell 0.40 ($40) to 1.70 ($170). Open interest in the OEX March 600 puts was 7,066 as of last night's close. Trading there was robust, with 3,467 contracts trading this morning, as traders who bought the puts sold them back to the market to close their position. The March 600 puts rose 0.70 ($70) to 6 ($600).
As far as individual stocks go, with a lot of put options in the money, market makers have to sell short those options to hedge themselves, thus helping put pressure on the underlying stock price.
Meanwhile, market makers who sold call options and had to buy stock along the way to hedge those positions are now probably selling that stock, considering there are a lot of call options out there that will expire
out-of-the-money and they won't have to deliver shares of the underlying security because there's no way the call options will be exercised. As the hedge becomes less necessary, the shares can be sold off.
It is arguable that the hedging and unwinding of positions helped spark the steep downdraft in the market this morning. However, as the selling has dried up, the market has made a bit of a bounce off its intraday lows. Expiration pressure typically picks up again in the last hour of trading.
As an aside, on average, according to the
Options Industry Council
, an industry trade group, more than 50% of options positions are closed out in the marketplace before expiration.
Meanwhile, with all the talk of capitulation lately, one hedge fund manager suggested that what the capitulation people are waiting for may not in fact come and that the market could bottom out in a much different, less-than-climactic way
Rob Sorrentino of
Sorrentino Asset Management
, said that there are two types of bottoms, one with the traditional
capitulation, and then there's another where the market just "grinds lower," a bottom that "takes time" and "wears people out" and isn't as easily identifiable. He thinks the market may be in the latter scenario, in part because everyone is looking for and talking about capitulation.
"That's what it feels like," he said.