Friday is quadruple witching day in the stock indices. June options, futures, stock options and single stock futures all expire Friday afternoon.
What Does This Mean?
Typically, this leads to a volatile afternoon as the markets chop around between heavily traded option strikes as speculators take their profits and professional market makers actively manage the delta neutrality of the option exposure in their portfolios to close out the quarter. Generally, speaking, the stock indices close lower better than two thirds of the time.
Sell Rallies
Obviously, the short-term play is to sell rallies on quarterly expirations while looking for the market to close lower. However, I think there’s a bigger picture trade to take advantage of here and some choppy downside action would only sweeten the pot.
Big Players
Commercial traders typically show heavy buying into option expiration as they’re usually buying futures to cover their net short call options as the market climbs. Their pattern looks a bit different this expiration. We haven’t seen buying nearly as strong as we have on recent expirations where the market has fallen heading into it. I’ve highlighted them on this chart. Therefore, I don’t think the big trade today is going to come from the expiration itself.
Bottom Line
The big play should come because the commercial trader net position has become net long heading into this expiration. We’ve seen this in three out of the previous four expirations including last June’s as well as June of 2012. I’ve marked the chart over the last four years to make it easier to visualize. The point is, when there’s enough buying pressure from the commercial trader category to make them net long, it has led to very tradable rallies post expiration. Don’t let choppy action to the downside scare off new long positions in the September contract.
