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When I was an options market maker, I tried to avoid being out of the office on the third Friday of the month, especially the four times a year that those represented quarterly, not monthly expirations. Instead, this morning I found myself responding to a question with, “today’s expiration is unlikely to be a factor.”What happened?

The easy answer is “daily expirations”. If that suffices for you, have a great weekend and please read our column again on Monday. The full answer is of course a bit more nuanced.If you prefer that, please read on.

The key to understanding the now-typical lack of expiration-related fireworks is part of human nature. The more one does something, the easier it gets.If you’ve ever assembled something from a kit, whether it’s Ikea furniture or some other household item, you should be able to relate to that idea.The first time you encounter a chaotic pile of parts, guided only by a pictogram, it might take some time to get one’s bearings.You might also make some mistakes or find some leftover parts.By the time you’ve tackled that third or fourth bookcase, it’s relative child’s play. 

Obviously, options trading is a bit more complex than assembling a bookcase. For starters, there’s neither a pictogram nor a handy hex wrench. More crucially, if you assemble your hedges incorrectly or forget a piece of your portfolio, the financial consequences can be quite painful. Yet the more times that a particular trader handles an expiration, the less fear it inspires. 

That applies to the industry as a whole. Expirations became increasingly common as expiration cycles became more compressed.As noted above, we only dealt with expirations infrequently – at most, once a month.Considering that no two market conditions are ever identical, the industry only had a limited number of opportunities to develop a relative comfort level with them.Uncertainty creates volatility, and that uncertainty had a way of expressing itself in some wild moves on expiration Fridays. 

Then, in 2005 weekly options were introduced.Options on the most active stocks, indices, and ETFs began to expire 52 times a year, not just 12.Considering that traders have demonstrated a fondness for more popular names and shorter expirations, much of the action gravitated to those frequently expiring options.By 2016, Wednesdays and then Mondays were added to the expiration cycles for key indices and related ETFs. Then, in 2022, the calendar was filled with Tuesday and Thursday expirations, meaning expirations now occurred more than 250 times a year. 

In other words, we now have more than 20X the amount of options expiration each year. Do you remember what I said about the more one does something, the easier it gets?

Thus, the character of the positioning on options that expire only once a month has changed.The monthly options are listed long before weekly and daily expiring options are available.Thus, if one wants to use options as a long- or medium-term hedge, one will gravitate toward monthly options.In a relentlessly rising market, like the one we’ve been in for months, those positions will be clustered in strikes well below the current level of the market.Those options have very little influence on the market’s movement thanks to their very low or high deltas and lack of gamma.

That is what we saw this morning.Monthly index options expire into cash on the market’s open.That makes them harder to hedge.When we have high open interest in at-money, AM-expiring options, moves in pre-market futures can exacerbate early volatility.Put simply expiring options can act as a magnet or a slingshot. When the bulk of the positioning is far away from the potential opening level, it doesn’t really matter whether the amount of those expiring options is large.Presumably they’ve been hedged for quite some time.

Of course, there is always potential for traders to exploit positions that expire on a Friday afternoon.For starters, there are more than 600 classes of weekly options, as opposed to the handful of highly significant classes that expire daily.That is why we’ve written about “Freaky Fridays”, and we can’t rule out big moves – generally to the upside – on Friday afternoons.(I’m seeing an attempt at one as I type this now…)

I suppose I have a bit of nostalgia for the crazy old triple witching expirations. But as the options industry has matured, some of its youthful wildness has abated. And that’s a good thing for the markets.

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