Today's quarterly simultaneous expiration of index options, equity options and index futures -- known less-than-fondly as triple-witching -- holds the potential to roil markets, but after yesterday's 66-point run in the S&P 500, traders were expecting short covering to keep stocks relatively buoyant.
While the 499-point
jump on Thursday flushed out most shorts, the routine covering that comes with expiration was still in progress. On expiration Friday, traders who sell calls must go into the public markets to buy shares with which they will fulfill their obligations to the call buyers.
One factor that emerged as the morning's gains burned off was a rising
Chicago Board Options Exchange's
measure of how much traders are willing to pay for options on the
100 contracts. A rising VIX shows traders paying higher levels for puts
, options which increase in value as stocks fall.
By Thursday, Florida hedge fund manager Rob Sorrentino had already established long positions in S&P 500 call options, contracts he said he bought when they were less expensive during the last week of February. Back then, the blue-chips were being battered and a handful of
stocks were driving the market. The S&P 500 was at 1380; by midday Friday, it was trading at 1473.
Tuesday, the tide began to change; Wednesday, Sorrentino said, big hedge fund money went "aggressively short the S&P." Thursday's explosion caused them to cover and much of that continued Friday morning. "There was so much money going into the puts at that point, the calls weren't expensive," he said.
With the market clearly split in two, going long the S&P 500 might not have seemed the most prudent move. Sorrentino, who runs
Sorrentino Asset Management
in Naples, Fla., couldn't resist the bargain.
Today's activity he expected to "flush out" the remaining shorts. Because expiration-related activity is heightened at the open, when the S&P 500 options settle, and the close, when the S&P
contracts settle, Sorrentino says the market's bump up in the morning could be replayed later in the session.
About 1000 miles north in Washington, D.C., Dave Schultz of
Summit Capital Management
said the expiration didn't cause Thursday's run but certainly added some juice to it because expiration forced covering of shorter-term positions.
Schultz said he was less concerned with expiration than he was with tech stocks that were rebounding from recent lows.
traded as low as 99 in early January, rose briefly and then fell to 105 in early February.
Thursday's rally, however, yanked it so hard from the doldrums that even call buyers were playing for continued strength today. At midday, EMC was up 4 3/4 to 127 1/2 and the out-of-the-money March 130 calls traded more than 1300 contracts, volume that pushed the price up 1/4 ($25) to 5/16 ($31.25).
Much of that volume might have been initiated by call sellers expecting EMC to fall short of 130 today, but the contract's rising premium showed some willingness by buyers to pay slightly more than closeout price.
Volume was also strong in EMC's March 125 calls, which traded more than 3500 contracts by midday and saw a major spike in premium. The price of the contract jumped 2 1/8 ($212.50) to 2 7/8 ($287.50).
was another Dow component on a roll today. As the stock rose 4 7/16 to 129 1/2, there was action in the chipmaker's March 130 calls, which rose in price 9/16 ($56.25) to 11/16 ($68.75) on volume of more than 1079 contracts.
Intel looked, at midday, to be a likely candidate to get pinned, another expiration phenomenon occurring when a stock falls just short of its next strike price. That leaves traders who have sold calls without the obligation to deliver shares. Intel's next strike price is 130.