NEW YORK (CNN/Money) - In recent years the quarterly expiration of options and futures has rarely lived up to its billing.
Just like the jokes on Wall Street got less funny when former options strategist Harry Roth passed away in 1997 (ask anyone), what used to be called 'triple witching' (and now, with the advent of individual stock futures, gets the less-cool name 'quadruple witching') isn't nearly as exciting as it used to be. Investors have tended to show far greater care in unwinding positions than they used to, and as a result expirations have tended to be far less volatile than in the past.
But sometimes you still hear a zinger from a trading desk and sometimes the market sees a big expiration. The one coming up Friday may be a case in point.
Investors are holding a huge amount of December 'call' options, which allow them to buy at a set price, on the S&P 100 index which are "in the money" -- which means that they are trading below the index's current price. At the same time, points out Larry McMillan of McMillan Analysis, there is very little open interest in December in-the-money 'put' options, which allow investors to sell at a set price.
Hold one of these in-the-money S&P 100 calls until it expires on Friday, and whoever sold it must deliver to you the underlying stocks at a fixed price -- which means they'd have to do a lot of buying. That's generally way too big a pain for everybody involved, so instead the seller will buy the call back from you -- probably at a much higher price than you bought if for, given the way the market has gone up over the last few months.
Many of the holders of those in-the-money calls, points out McMillan, have hedged them by selling the underlying index short. When they sell their calls, they're also going to unwind their short positions by buying shares. (A short sale entails selling borrowed securities; it pays off when the securities fall in value.)
As of Tuesday's close, there were more than 30,000 more in-the-money S&P 100 calls than there were puts. If the index moves decidedly above its current 535, that difference would swell to more than 50,000. If it moved above 540, the difference would be more than 80,000 -- as big as it's gotten in recent memory. (A similar story can be told with options on the S&P 500.) In other words, the more stocks go up, the more of a boost the market could get.
"These things are never for-certain, but it looks very bullish," said McMillan.
Beatniks are out to make it rich
Meanwhile, Edward Tom at Credit Suisse First Boston's equity derivatives strategy group notes that the ratio of total puts to total calls (in-the-money and out-of-the-money) on the S&P 500 is near its highest level in four years. Going into an expiration, he wrote in a recent note, that is often a very bullish signal because it "tends to assuage fears of a downside shock and increases investor confidence toward initiating long positions."
Over in the Chicago pits, it looks like the futures expiration could also be a positive -- although traders aren't as strongly bullish as options players seem to be. Calendar spreads, the difference between December and March futures contracts, and changes in the S&P 500 index suggest an upward bias.
"I would say expiration looks slightly to the buyside," said Robert Parks, senior vice president at Citigroup Futures.
So, will the market be bathed in green as expiration dynamics come into play Thursday and Friday? While there's a fine set-up for a rally, this is a situation crowded with caveats. Figuring out where things tilt on expiration is notoriously squirrelly. A positive bias is hardly enough to trump any bad news that might come down the pike. And, maybe most troubling, everybody is talking about how good expiration could be.
"Everything I've heard is that expiration skewed to the buyside," joked Wells Fargo Securities managing director of listed trading Todd Clark. "That probably means stocks will be for sale."
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