Triple Witch And SMCI Converge Today

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Today is a crucial expiration, particularly for holders of SMCI and its options. Spoiler alert – don’t turn off your screen for the weekend when the market closes.

Did anyone remember (or care) that today is a triple-witching Friday? Sure, they’ve been overshadowed by weekly and now daily expirations, but it is important to keep in mind that EVERY options class has so-called “zero-dated” or “0DTE” options on major expirations. That’s always been the case, by the way. Over a year ago, when those options came to the fore, I asserted that there is nothing systemically different about 0DTE options. We’ve simply compressed the normal expiration cycle for a narrow list of options classes. 

But there is one thing that is extremely important to today’s quarterly expiration, and that is the rebalancing that will occur after the close. Super Micro Computer (SMCI) and Deckers Outdoor (DECK) will be replacing Whirlpool (WHR) and Zions National Bank (ZION) in the S&P 500 Index (SPX).

SMCI has been a truly magnificent stock, and it will culminate its parabolic advance with its addition to the S&P 500. The chart below shows just how spectacular SMCI’s rise has been – particularly in the short year-to-date so far. The two seeming flat lines at the bottom are the Nasdaq 100 (NDX) and SPX, which are each up about 7% during that period, while the “laggard” in the middle of the chart is Nvidia (NVDA). It’s not normal for stocks to nearly quadruple in three months!


3-Month Chart, SMCI (red/green daily candles), NVDA (purple line), NDX (blue line), SPX (white line)

(Click on image to enlarge)

3-Month Chart, SMCI (red/green daily candles), NVDA (purple line), NDX (blue line), SPX (white line)

Source: Interactive Brokers

It is important to note that roughly $11bn in market cap will be leaving the index (WHR + ZION) while about $85 bn will be going in – over $60bn in SMCI alone. Since index funds need to match SPX’s composition when markets open on Friday, they will need to sell plenty of stock to accommodate the new entrants, which will be far more heavily weighted than those exiting. The need for index funds to sell some combination of 500 stocks in order to buy two is a likely factor behind today’s downdraft. 

It will be imperative that options traders keep an eye on not only the close but the aftermarket activity in SMCI. Bear in mind that index funds utilize market-on-close orders to ensure that their rebalancing occurs at the final closing price of SPX. It is therefore very likely that the stock could jump sharply at the close when index funds culminate their buying. It is also not improbable that the stock could have a meaningful move after the close, potentially to the downside. That makes it imperative for those with expiring options positions in SMCI (or anything else with an outsized move on the close) to keep an eye on the aftermarket activity of the shares.

Keep in mind how options expiration works. While I recommend re-reading a detailed primer that I wrote for this site, it is important to remember that OCC (Options Clearing Corp) automatically exercises any equity options that are at least one cent in the money AT THE OFFICIAL CLOSE. As I type this, SMCI is trading around $1100.If we were to close at $1100.01, all calls with strikes of $1100 or less will be automatically exercised, as will all puts with strikes above $1100. 

BUT!!! The holder of an option retains the ability to exercise or lapse it at their discretion. Remember – an option conveys the right, but not the obligation, to buy or sell (call vs. put) a stock at a given price on or before the option expires. And that decision does not need to be made until sometime after the close. At IBKR, we accept “contrary” exercise instructions until 5:25 EDT (which is later than many of our competitors). Here is why that is crucial.

Let’s say that SMCI rallies up to $1155 at today’s close but sinks back to $1125 afterward. If that occurs, those who are long $1150 calls may want to lapse them, while those who are long $1150 puts may want to exercise those. But you need to tell us if that is your decision because they will be exercised (or lapsed) unless you tell us otherwise. Understand how to submit instructions and make your decisions based upon whether you want to go home long or short after you see the post-close reaction to the index addition.

By the way, those who are short options need to be especially vigilant about potential surprises. A significant post-close move could result in someone expecting options that might seem to expire worthless based on the closing price, to get exercised nonetheless. The safest thing to do, of course, would be to close out near-money short positions. But if not, you may want to consider pre-emptively hedging positions that might get assigned based upon aftermarket activity.


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Disclosure: OPTIONS TRADING

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