00:00 Jared Blikre
Five trillion dollars is set to vanish Friday on triple witching options expiration, but the real action lately has been coming from options that die every afternoon. I’m Jared Blikre, host of Stocks and Translation. First up, Friday is triple witching, the expiration where quarterly index futures roll off as well as monthly index options and monthly equity options, that stock options as well. Index contracts, they settle at the open of the day, while individual stock options, they wrap up at the close, and this sparks a huge rebalancing act throughout the day. But over the last decade, daily and weekly options have opened up as well, which traders have been increasingly using for same day trades. And that’s what zero days to expiration options are, trades that are opened and closed on the very same day. And they’re taking over the monthlies in volume. And unlike monthly options, the index options, they settle at the end of the day, not the open. So this makes them useful for playing these event driven markets. Now check this out. Back in 2016, at the very left-hand side beginning of this chart, only 5% of options were same day trades. That’s as weekly options had just been green lighted. But fast forward to today, nearly half of all S&P option volume is zero dated. That is a massive shift making every afternoon a potential volatility event. And here is the retail versus institutional split. Retail traders, that’s up top and white, they often step back when markets are volatile. In this chart, times of high volatility, they’re shaded gray. But then look how institutions step up during this period. So-called smart money gravitates more to zero dated options in times of stress, while retail, retail tends to back off. And there are clear advantages to these same day options. One is rapid payoff. You get results quickly, which isn’t always good, but it can work for you. Also, there’s good volume and liquidity on these contracts most of the day. This means that you can get in, easy entry and also easy exit. And same day means that there’s no overnight gap. So by definition, maybe you can sleep a little bit better. But there’s also a flip side. That rapid payoff means rapid time decay. So premiums, they evaporate fast if you’re buying options. Also, that high liquidity, it dries up near the close. So watch out for wide spreads that make it hard to trade as the trading day is about to end. And finally, and most importantly, it’s really easy to over lever. A little leverage goes a long way. So final final thought here, it’s commonly believed that triple witching means spiky volatility, but that’s mostly true for individual stocks. Indices like the S&P 500 actually tend to calm down as the big names get pinned to their big strike levels. So don’t expect too much volatility this Friday from triple witching itself, but we could still get moves from plays made on the geopolitical chessboard. And tune into Stocks and Translation for more jargon busting deep dives. New episodes on Tuesdays and Thursdays on Yahoo Finance’s website or wherever you find your podcast.
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