by Danny Riley

Triple Witch on Deck as ES Hits ATHs

Seasonality is in play later this month

Follow @MrTopStep on Twitter and please share if you find our work valuable.

Our View

The value of today’s September Triple Witching is $5.1 trillion in options. According to Brent Kochuba, founder of the options platform SpotGamma, the size of options positions expiring is 4-to-1 in favor of calls versus puts, which helped stocks deliver their best five-day stretch of the year last week. Given that Nvidia Corp. is trading with a high amount of calls relative to the rest of the market, that should serve as a “catalyst for further equity upside,” he said.

Yesterday’s $4+ billion to sell on the 3:50 imbalance seems like an enormous amount of money—and it is—but a good share of the day’s volume will print in the first and last hour. That doesn’t mean the markets won’t be moving; they will be, but there is a tendency to slow down after the early action.

I have written about this before: The quarterly options expirations used to be one of the busiest times of the year for my desk in the S&P. Because of all the different banks, hedge funds, and prop trading firms, at least one, if not three or four, had positions they either had to get out of or add to, and UBS was “always” on the line with me on the quarterlies. Steve Lau, head of program trading at UBS, knew from using the desk that there would be big order flow to trade off of. If I was buying futures, he was selling them for buy programs; if I was selling, he was bidding for the SPU to do sell programs.

I remember that the volume was so thick there were times we would do thousands of lots and not even move the S&P. This will be the same on the NYSE; pay attention to the volume that prints on the open and for the first 20 minutes. Over time, as electronic trading started to shift more volume to the screen, the quadruple witching became triple witching, and as customers migrated over, it got quieter and quieter. Even though many remained loyal to the desk, there was no stopping Globex, and as that was happening, I was transitioning the desk over to the S&P options and putting Globex terminals on the desk.

I often think of how unique those times were—all the prices flashing on the board, desk clerks screaming at the clerks in the pits flashing orders, all the locals and order-fillers bidding and offering, screaming and pushing, the CME employees in the pulpit taking trades from the pit and entering them into quote boards. It seems so surreal, but back then, it was the Wild West where anything could happen. It was one of the last bastions where an uneducated guy like me could compete with some of the largest banks and hedge funds in the world.

I knew things were changing; I was there, but today is totally different. There is no roar of the floor on a Friday quad witch; now it’s just the hum of your desktop PC.

Our Lean

Weak seasonality has also played a role in the past, with triple witching in September typically being followed by an equity swoon the ensuing week. Since 1990, the S&P 500 has slumped 1.1% on average the week after September options expiration, according to the Stock Trader’s Almanac. There have only been four exceptions where stocks saw across-the-board gains in that stretch: 1998, 2001, 2010 and 2016.

According to the Stock Trader’s Almanac:

1) The September Triple Witching has been down 8 of the last 11 occasions

2) The week after the Triple Witching has the Dow down 25 of the last 33 occasions with and average loss of 1.1%

3) Monday, (the last trading day of September and the third quarter) has the S&P down 17 of the last 26 occasions but up 5 of the last 8

4) The first trading day of October is mixed, with the Dow up 9 of the last 18, up 2.7% in 2022

5) Thursday October 3, Rosh Hashanah — ‘Sell Rosh Hashanah, buy Yom Kippur’

Our Lean: First, the ES always rallies off a weak close. I think we could see some type of bounce but my guess is you sell any 30 to 50 point rips early and look for SpotGamma’s late gamma buy. That said, as you can see above we could be running into some weak seasonals over the next week or so.

MiM and Daily Recap

ES Recap

The ES did what it does best; it took a weak Fed day sell-off and closed weak, and then the ES rallied all the way up to 5779.00, up 1.54%, while the NQ was up 2.08%. It opened Thursday’s regular session at 5778.25. After the open, the ES traded up to 5779.25 at 9:31 and then sold off 31 points down to 5748.25.

It rallied 39.25 points up to 5787.50, sold off 25.5 points down to 5762.00 at 11:12, rallied up to 5779.75 at 11:28, and then sold off down to another higher low at 5768.25 at 11:56. The ES rallied 20.5 points, then pulled back 8.75 points down to 5780.00. After the pullback, the ES rallied 17.5 points up to 5797.50 at 1:48. After the high, the ES made a few lower highs and sold off 20.5 points down to 5777.00 at 2:20, then rallied up to 5790.50 at 2:44, then at 2:52, it sold off down to 5774.25.

It traded 5784.00 as the 3:50 cash imbalance showed $4.2 billion to sell, then sold off down to 5771.50, traded up to 5781.00, and traded at 5778.00 on the 4:00 cash close. After 4:00, the ES sold off down to 5772.50, drifted up to 5776.75, and traded at 5774.50 at the 5:00 futures close.

In the end, the day after the rate cut rally and a short premium squeeze manhandled the ES to another new all-time high. In terms of the ES and NQ’s overall tone, they were firm. In terms of the ES’s overall trade, volume was solid at 1.67 million contracts traded.

Technical Edge

NYSE Breadth: 72% Upside Volume
Nasdaq Breadth: 74% Upside Volume
Advance/Decline: 78% Advance
VIX: ~16.25

Guest Posts — SpotGamma

SpotGamma is one the the shining stars of the options markets. If you have never heard of them or already know of them and have never signed up for their options flow products or the SG Academy, I fully suggest you check them out and add them to your trader’s toolbox.

Here’s a snippet from them:

Futures are off fractionally ahead of today’s large expiration. We continue to watch 5,700 as our pivot level: maintain net longs >5,700, and shift to a more flat/neutral position below. Ultimately we suspect that traders will be using any OPEX related weakness to buy-in, but should the SPX break <5,650 we’ll be looking to own puts.

First up for expiry are the very large SPX AM options, which settle at 9:30 AM. This is then followed by SPX PM options, major ETF’s (SPY, QQQ, etc) and single stocks settling at 4PM.

The Trace gamma map shows how these expirations impact the SPX dealer hedging position… quite frankly in a way we’ve never been able to articulate.

As you can see, the 9:30AM expiration removes some positive gamma (blue zone(s) >5,700 decrease), with the 4PM expiration serving to remove whatever positive gamma is left. For this reason our map is a light shade of red after 4PM .

This suggests that we should have some stability >5,700 for today, and we lose that pinning/stability post-OPEX.