3.5 Trillion Reasons To Brace For Massive Quad-Witching Expiration
As Goldman's head of FX sales Tony Pasquariello wrote last Friday, "next week is a huge one, featuring the FOMC on Wednesday and a major derivatives expiry on Friday." And indeed, now that the Fed's rate hike is officially a fact and in the rearview mirror, Wall Street traders are bracing for the week's final fireworks.
In the quarterly event known as "quad witching" (technically, it's been "triple" since the close of OneChicago in September 2020, when single stock futures ceased trading, but for veteran traders it will always be quad), over $3.5 trillion of Index Options, Index Futures and Single Stock Options expire, either at the open of trade or at the close on Friday.
Adding to the frenzy, at the same time more near-the-money options are maturing than at any time since 2019 meaning that highly caffeinated traders will actively be trading around those positions as they seek to capitalize on any drift away "pins" (we will have a full list of the stocks most likely to see significant volatility tomorrow morning).
Furthermore, according to Goldman's Rocky Fishman, investors will also be watching the ETN market given the substantial size of expiring VXX. As a reminder, the VXX - the single largest volatility-tracking ETN - has been trading at a 12% premium to its NAV since its issuer suspended creations...
... and should the VXX rally strongly from its current level, its in-the-money call options would be large relative to shares outstanding.
Tomorrow's quad witching also coincides with a rebalancing of benchmark indexes including the S&P 500, a two-for-one special that leads to soaring trading volumes that rank among the highest of the year. According to an estimate from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the rebalance in the index alone could spur $33 billion of stock trades.
Traditionally, over the past year, "quad witches" have seen poor market returns, however heading into tomorrow's option expiration, the S&P is posting the best 3-day return since the Dec 2020 election.
So is the party about to end? As many contracts expire, Bloomberg notes that the key question is whether investors will rebuild their record holdings of index puts amid growth concerns and the war in Ukraine -- or will they come out of their shells, and chase the market rebound with call contracts, creating a negative gamma meltup at a time when most dealers are still short gamma.
Or will stocks tumble as trading desks such as JPMorgan "sell the rally" to naive investors who listen to the bank's latest call to buy the dip.
But while retail investors are confident they know how to trade tomorrow's chaos, veteran traders are ducking for cover: “I’ve never seen an environment where you’ve had so many potential overhangs in the market that can not be controlled,” said David Wagner, a portfolio manager at Aptus Capital Advisors. “We’ll see if people can see to redeploy their puts.”
If not, we may get an extension of the meltup as an avalanche of put closing sparks a delta cascade: exploding derivatives volume has been a fixture of the post-pandemic market -- whipsawing underlying stocks in both directions, again and again. To strategists including Nomura's Charlie McElligott, this week’s advance in the S&P 500 has again been amplified by the hedging activity of market-makers. And should we get another gamma squeeze, the S&P may soar.
On the other hand, many of the usual catalysts for a melt up are missing: thanks to the recent surge in stocks, dealers are now flat gamma, meaning they no longer have to accentuate market trends..
Meanwhile, thanks to the recent 3-day meltup, the negative delta has also been unwound faster than anticipated. Notably, as SpotGamma explains, yesterday saw a total lack of positive call deltas in the SPY & QQQ. You can see below that SPY traders were fairly heavy call sellers into the AM short-stock cover, and then after 1PM ET and through the FOMC flow was neutral. The QQQ chart was similar.
Commenting on the same phenomenon, Nomura's McElligott writes that the “Short Delta” hedge cover on the murdering of downside Puts led to move short-covering of client dynamic hedges in futures too, where for ES, the bank's imbalance monitor showed what was the second largest day of “buy pressure” over the past month for all lot sizes, led by what looked like straight-up VWAP style buying-to-cover (slicing your order in the machine over “small lots”)
Another reason why stocks could defy prevailing sentiment, which as the latest Fear and Greed index describes simply as "fear"...
... is technicals and positioning. As Marko Kolanovic notes, current risk positioning is very light as a result of high and persistent volatility, and risk aversion caused by global geopolitical developments: "the AAII bull-bear indicator at -27 is near its 2020 lows and 2 standard deviations below average. Equity exposure for volatility sensitive investors – the largest and fastest group of investors (including insurance, risk parity, dynamically hedged portfolios, HF platforms, etc.) – is now in its ~5-10th percentile, and for this reason risks are skewed to the upside." Meanwhile, with market sentiment weak and institutional-fund exposure to equities near mutliyear lows, caution in the derivatives market is everywhere. The 20-day average of the Cboe put-call ratio for equities, for example, hovers near a two-year high, which means that once again many are hedged and with little impetus to sell, stocks may simply melt up instead.
For those asking which strikes matter the most now into Op-Ex / and what % of overall gamma is set to expire along with the current and max Gamma sensitivity, here is the answer courtesy of Nomura.
SPX / SPY currently “pinning” btwn 4400 strike ($4.1B $Gamma), 4350 ($2.5B), 4300 ($2.4B); currently see ~43% of the $Gamma dropping-off for Friday’s expiration; currently at “Zero Gamma” level, “Max Short Gamma” at 4125 and -$17B per 1% move
Source: Nomura
QQQ $350 strike ($640mm $Gamma), $345 ($608mm), $340 ($595mm); currently see 56% of the $Gamma dropping-off for Friday’s expiration; currently at “Zero Gamma” level, “Max Short Gamma” at $314 and ~-$1.7B per 1%
Source: Nomura
IWM $200 strike ($471mm $Gamma), $205 ($274mm), $195 ($199mm); currently see 63% of the $Gamma dropping-off for Friday’s expiration; currently a modest “Short Gamma vs Spot” at -$100mm per 1% currently, “Max Short Gamma” at $192 and ~-$600mm per 1%
Source: Nomura
HYG $82 strike ($973mm $Gamma), $81 ($799mm), $80 ($477mm); currently see 58% of the $Gamma dropping-off for Friday’s expiration; currently still very “Short Gamma vs Spot” at -$1.0B per 1% move, “Max Short Gamma” at $79, -$1.2B per 1% move
That is a lot of gamma to 'unclench'.
In any case, amid this cacophony of bullish and bearish catalysts, it is virtually impossible to come up with a coherent case for either sustained market upside or another sharp burst of selling: “We see a general trend of continued risk aversion among investors, and expectations that the stock market remains volatile,” said Steve Sears, president at Options Solutions. “There are so many major events that could change the market’s tempo that hedging and patient fortitude appears to be the message from the options market.”
JMIR Neurotechnology, published by JMIR Publications, welcomes submissions from researchers, clinicians, caregivers, and technologists that explore novel…
JMIR Neurotechnology, published by JMIR Publications, welcomes submissions from researchers, clinicians, caregivers, and technologists that explore novel diagnostic and treatment tools for neurological disorders, particularly those leveraging the potential of neurotechnology.
Credit: JMIR Publications
JMIR Neurotechnology, published by JMIR Publications, welcomes submissions from researchers, clinicians, caregivers, and technologists that explore novel diagnostic and treatment tools for neurological disorders, particularly those leveraging the potential of neurotechnology.
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fMRI study finds correlated shifts in brain connectivity associated with overthinking in adolescents
COLUMBUS, Ohio – A new study from The Ohio State University Wexner Medical Center and College of Medicine, University of Utah and University of Exeter…
COLUMBUS, Ohio – A new study from The Ohio State University Wexner Medical Center and College of Medicine, University of Utah and University of Exeter (UK) substantiates previous groundbreaking research that rumination (overthinking) can be reduced through an intervention called Rumination-focused Cognitive Behavioral Therapy (RF-CBT). In addition, the use of fMRI technology allowed researchers to observe correlated shifts in the brain connectivity associated with overthinking.
Credit: The Ohio State University Wexner Medical Center
COLUMBUS, Ohio – A new study from The Ohio State University Wexner Medical Center and College of Medicine, University of Utah and University of Exeter (UK) substantiates previous groundbreaking research that rumination (overthinking) can be reduced through an intervention called Rumination-focused Cognitive Behavioral Therapy (RF-CBT). In addition, the use of fMRI technology allowed researchers to observe correlated shifts in the brain connectivity associated with overthinking.
Study findings are published online in the journal Biological Psychiatry Global Open Science.
“We know adolescent development is pivotal. Their brains are maturing, and habits are forming. Interventions like RF-CBT can be game-changers, steering them towards a mentally healthy adulthood. We were particularly excited that the treatment seemed developmentally appropriate and was acceptable and accessible via telehealth during the early pandemic,” said corresponding author Scott Langenecker, PhD, vice chair of research in the Department of Psychiatry and Behavioral Health at Ohio State, who started this project while at the University of Utah.
RF-CBT is a promising approach pioneered by Ed Watkins, PhD, professor of experimental and applied Clinical Psychology at the University of Exeter. It has been shown to be effective among adults with recurrent depression.
“We wanted to see if we could adapt it for a younger population to prevent the ongoing burden of depressive relapse,” said Rachel Jacobs, PhD, adjunct assistant professor of psychiatry and behavioral sciences at Northwestern University who conducted the pilot study in 2016.
“As a clinician, I continued to observe that standard CBT tools such as cognitive restructuring didn’t give young people the tools to break out of the painful mental loops that contribute to experiencing depression again. If we could find a way to do that, maybe we could help young people stay well as they transition to adulthood, which has become even more important since we’ve observed the mental health impact of COVID-19,” Jacobs said.
In the just published trial, 76 teenagers, ages 14-17, with a history of depression were randomly assigned to 10-14 sessions of RF-CBT, while controls were allowed and encouraged to receive any standard treatment. Teens reported ruminating significantly less if they received RF-CBT. Even more intriguing, fMRI illustrated shifts in brain connectivity, marking a change at the neural level.
Specifically, there was a reduction in the connection between the left posterior cingulate cortex and two other regions; the right inferior frontal gyrus and right inferior temporal gyrus. These zones, involved in self-referential thinking and emotional stimuli processing, respectively, suggest RF-CBT can enhance the brain’s ability to shift out of the rumination habit. Notably, this work is a pre-registered replication; it demonstrates the same brain and clinical effects in the Utah sample in 2023 that was first reported in the Chicago sample in 2016.
“For the first time, this paper shows that the version of rumination-focused CBT we have developed at the University of Exeter leads to changes in connectivity in brain regions in adolescents with a history of depression relative to treatment as usual. This is exciting, as it suggests the CBT either helps patients to gain more effortless control over rumination or makes it less habitual. We urgently need new ways to reduce rumination in this group in order to improve the mental health of our young people,” Watkins said.
Next, the researchers will focus on demonstrating the efficacy of RF-CBT in a larger sample with an active treatment control, including continued work at Ohio State, Nationwide Children’s Hospital, University of Exeter, University of Utah and the Utah Center for Evidence Based Treatment. Future directions include bolstering access to teens in clinical settings and enhancing the ways we can learn about how this treatment helps youth with similar conditions.
“Our paper suggests a science-backed method to break the rumination cycle and reinforces the idea that it’s never too late or too early to foster healthier mental habits. Our research team thanks the youths and families who participated in this study for their commitment and dedication to reducing the burden of depression through science and treatment, particularly during the challenges of a global pandemic,” Langenecker said.
This work was supported by the National Institutes of Mental Health and funds from the Huntsman Mental Health Institute and is dedicated to researcher Kortni K. Meyers and others who have lost their lives to depression.
# # #
Journal
Biological Psychiatry Global Open Science
DOI
10.1016/j.bpsgos.2023.08.012
Method of Research
Randomized controlled/clinical trial
Subject of Research
People
Article Title
Rumination-Focused Cognitive Behavioral Therapy Reduces Rumination and Targeted Cross-network Connectivity in Youth With a History of Depression: Replication in a Preregistered Randomized Clinical Trial
Article Publication Date
27-Oct-2023
COI Statement
Edward R. Watkins reports royalties from a treatment manual for RF-CBT published by Guilford Press and licensing of RF-CBT for Internet treatment packages. Sheila E. Crowell is a co-owner of the Utah Center for Evidence Based Treatment, an outpatient psychotherapy practice that is unrelated to this work. Scott A. Langenecker reports
consultant payments from Stony Brook University, Penn State University, and Johns Hopkins University (unrelated to this work) and payments from the Center for Scientific Review (unrelated to this work) and part ownership of Secondary Triad, Inc. (unrelated to this work). All other authors report no biomedical financial interests or potential conflicts of interest.
Republicans and Democrats both have misconceptions about the energy sector, with the former often downplaying climate change and the latter misunderstanding oil industry operations.
Oil prices are determined by global supply and demand, not by individual oil companies; thus, claims of oil companies causing inflation or gouging prices are misplaced.
Implementing policies like windfall profits taxes on oil companies doesn't address the root issues of supply and demand, and it's essential for policymakers to have a comprehensive understanding of the energy sector for effective governance.
Good energy policy starts with a good understanding of energy issues. But both major political parties have glaring blind spots when it comes to understanding the energy sector.
Let me preface this column by noting that I am a registered Independent. I have major disagreements with both political parties, and I strive to approach issues from a completely objective viewpoint.
I think Republicans get it mostly wrong when it comes to climate change, and the importance of transitioning to alternative energy. But they seem to understand the current critical role of fossil fuels in the economy, and they mostly get it right when it comes to supporting nuclear power.
Democrats never seem to understand how the oil industry works. For example, look at the list of Democrats who signed onto the “Big Oil Windfall Profits Tax” introduced last year by Senator Sheldon Whitehouse (D-RI). In announcing the bill, Senator Whitehouse said it would “curb profiteering by oil companies and provide Americans relief at the gas pump.”
The bill was cosponsored by Senators Jeff Merkley (D-OR), Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Richard Blumenthal (D-CT), Tammy Baldwin (D-WI), Sherrod Brown (D-OH), Jack Reed (D-RI), Ed Markey (D-MA), Cory Booker (D-NJ), Michael Bennet (D-CO), and Bob Casey (D-PA). Congressman Ro Khanna (D-CA-17) introduced the legislation in the U.S. House of Representatives.
In addition to claims of price gouging, this same cast of characters has sometimes blamed oil company profits for inflation.
These politicians do not seem to understand that oil companies don’t control prices. Oil is the world’s most valuable commodity. Oil prices are set by buyers and sellers in global markets, based on supply and demand expectations.
Firms like ExxonMobil produce such a small share of the world’s oil they couldn’t move prices much if they wanted to. They benefit from high prices, but don’t set those prices. If they did, prices would never fall.
Saying profits cause inflation confuses cause and effect. It’s like saying hospitalizations cause car crashes. It is true that a car crash can result in hospitalization, but hospitalizations do not cause car crashes. If you believe the latter — and you try to address the problem by focusing on the hospital — you are working on the wrong problem.
Likewise, high profits in the oil industry and inflation are both caused by high oil prices. But high oil prices are caused by supply and demand factors.
Outside of rare circumstances, it’s impossible for oil companies to gouge you, because they don’t set the price. An example of true price gouging would be if a local gas station that sets its own prices doubled them when supply is ample. But Chevron earning more from high global prices set by markets is normal capitalism. That’s how the entire global commodity markets work.
I can only imagine that in the minds of some politicians, executives of Big Oil are meeting in smoke-filled boardrooms, rubbing their greedy hands together, and deciding to raise prices because Russia invaded Ukraine. But that’s not how any of this works.
If politicians want to address oil prices, they need to address the supply side and the demand side. When politicians propose windfall profits taxes on oil companies, intending to give rebates to consumers, it might sound good, but it doesn’t address the core issue.
High prices should signal consumers to use less energy, but rebates would diminish the price signal — which wouldn’t alleviate pressure on demand. On the supply side, punitive taxes on oil companies might sound appealing, but that’s less money that can be allocated to projects, which affects future supplies. Former Venezuelan president Hugo Chávez learned this lesson the hard way, and Venezuela is still paying the price.
Some have expressed outrage that oil companies are using record profits to buy back shares or pay special dividends to shareholders. But it’s common for companies, not just in the oil industry, to buy back shares or pay dividends when profits are high. It’s a part of how our capitalist system works. If companies can issue shares, they should be able to buy them back.
For consumers worried about high oil prices, there are options. You can invest in an oil company. Thus, when oil prices rise, so do your shares. Or consider switching to an electric vehicle to reduce your reliance on fossil fuels.
In conclusion, understanding energy issues is crucial for effective policymaking, yet both major political parties often exhibit significant misunderstandings of the energy sector. By understanding the complexities of the energy sector, policymakers and consumers alike can make informed decisions that contribute to a more sustainable and economically sound future.
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