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Not that long ago, I always had the third Friday of any month circled on my calendar. Monthly expirations were a really big deal for market makers like me, so I did my best to avoid scheduling vacation days on them. Today, I honestly nearly forgot that today was a monthly expiration. But those with positions in AM expiring S&P 500 (SPX) options certainly got an even bigger jolt than already jittery investors.

We’ve discussed at length why monthly and quarterly expirations have been largely eclipsed in recent months. Since I started trading options I’ve seen a steady compression in the expiration cycle. Weekly options arrived about 20 years ago, and with little fanfare intra-week options came along in 2016, followed by daily expirations in 2022. We’ve seen volumes migrate toward shorter-dated options, with a majority of volume now occurring in options with less than five days until expiration. But monthly expirations still matter, primarily because they remain the only time when we have cash-settled index options that expire on the open. 

Those options came into play overnight and this morning. There were over 87,000 contracts on SPX 5000 strike puts that expired today. With SPX closing around 5010 yesterday, they already posed some risk to the overall market. We have previously explained that the open interest in expiring options can act as either a magnet or a slingshot shortly before they cease trading. It depends on who holds the positions. If they are held primarily by hedgers, their propensity hedge gamma by buying low and selling high tends to keep the underlying around the strike. If speculators are long and hedgers are short, their activity can amplify the movement of the underlying.

Anyone who saw the reports about Israel and Iran last night received a bit of a shock, and those who were short the expiring 5000 puts must have had a rough night’s sleep. It seemed like a worst-case scenario about an escalating conflict, and markets acted accordingly. The initial reaction to the reports was understandably quite negative – oil rose, SPX futures and bond yields fell, and Japan’s Nikkei fell-3%, leading to Asian market declines – the concerns eased when Iran’s response was more dismissive than aggressive. The markets were already pricing in a fair amount of geopolitical worry. That is what led to the more muted response we saw early in today’s session, though equities have resumed their declines by midday.

Today’s declines are becoming part of a larger pattern. As we noted yesterday, US equities remain in a long-term uptrend, which means that investors with a longer time horizon can and should be on the lookout for stocks that have gotten unnecessarily cheap, but some of the shorter-term trends have turned sharply negative in a rapid time period. That tends to favor strategies that favor selling rallies rather than buying dips. To be fair, it’s not clear why the market psychology has switched so abruptly, but it clearly has. Look at the reaction to Netflix (NFLX) earnings, which should have been good enough for a nice bounce, but instead, we see analysts focused on the negative of paring back guidance about subscriber growth. And while VIX has risen in recent weeks from a 13 handle to the current 19, showing a heightened attitude about risk, it is far from the levels that indicate that fear has completely overtaken greed. Those would be in the high-20s – low ’30s (or beyond), whereas VIX has a long-term historical average in the high teens, which of course is around the current “elevated” level. 

Another key feature of monthly expirations is that all options classes have expiring options, rather than the relative handful that expire daily and the 600+ that expire every Friday. That gives us thousands of potential magnets and slingshots that we can see before today’s close. Don’t sleep on monthly expirations, especially when there are things that can keep you up at nights.

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