Watch This Before You Buy Options | Options Backtest
Summary
TLDRThe transcript discusses the impact of quarterly option expirations on market volatility. It highlights that while quarterly expirations, known as 'triple witching,' tend to be more volatile than average days, the market effectively adjusts for this, pricing in the expected increased movement. The study analyzed 20 years of S&P 500 and VIX data, comparing actual moves to expected moves based on the VIX. The findings suggest that although there is a higher percentage of significant moves during quarterly expirations, the market's ability to price volatility means that no actionable edge is provided by these events.
Takeaways
- 📈 Market makers adjust their positions during quarterly expirations, potentially impacting supply and demand for shares.
- 📊 The study analyzed 20 years of S&P 500 (SPY) and VIX data to measure market volatility around quarterly option expirations.
- 🔢 Daily, weekly, and bi-weekly market moves were compared as raw percentages and multiples of the VIX's expected move.
- 🌪️ One-day market moves greater than 1% occurred 26% of the time, while two-week moves greater than 1% happened 70% of the time.
- 📈 2% market moves happened daily 7% of the time, weekly 29%, and bi-weekly 43%. For quarterly option expirations, these numbers increased.
- 🔄 The market's volatility is priced in, with the actual moves during quarterly expirations aligning closely with expected moves based on VIX.
- 💡 The study suggests that while there is increased volatility around quarterly expirations, the market efficiently adjusts for this.
- 🚀 Triple witching, a term used for quarterly expirations, is characterized by large notional values, with the current figure being around five trillion.
- 🤔 The perception of increased market activity during quarterly expirations may not always translate to significant tradable differences.
- 🛠️ Market participants should be aware of the additional risk and premiums during quarterly expirations, but these are already factored into market prices.
- 📉 The study found no significant difference in overall market moves when adjusted for the expected volatility derived from the VIX.
Q & A
What is the significance of the term 'triple witching' in the context of the market?
-Triple witching refers to the quarterly expiration of stock index futures, stock index options, and single stock options. It is a significant event that can lead to increased market volatility due to the large notional value involved in these derivative contracts expiring on the same day.
How do market makers attempt to manage their positions during option expirations?
-Market makers manage their positions by being the counterparty to the option positions traders wish to take and by remaining as hedged as possible. They typically do this by using long and short positions to cancel out the Deltas from their option positions.
What was the purpose of the study mentioned in the transcript?
-The study aimed to determine if there is a noticeable difference in market volatility during quarterly option expirations compared to other expirations such as daily, weekly, or monthly ones.
How much data was used in the study to analyze market volatility?
-The study used 20 years' worth of data from the S&P 500 (SPY) and the CBOE Volatility Index (VIX) to analyze market movements and volatility during option expirations.
What did the study find regarding the frequency of market moves greater than 1% during quarterly option expirations?
-The study found that during quarterly option expirations, the frequency of market moves greater than 1% increased to 28% on a daily basis, 56% on a weekly basis, and 70% over two weeks, compared to the average days.
How did the study measure market volatility?
-The study measured market volatility by looking at the raw percentage moves of the market and comparing them to the expected moves derived from the VIX, which is a measure of market-implied volatility.
What was the conclusion of the study regarding the market's adjustment to volatility during quarterly expirations?
-The study concluded that the market adjusts perfectly for volatility during quarterly expirations. While there was a noticeable increase in actual market moves during these periods, the expected moves, as indicated by the VIX, were also higher, indicating that the market prices in the additional volatility.
What does the transcript suggest about the market's intelligence?
-The transcript suggests that the market is highly intelligent, as it effectively prices in the expected volatility and adjusts for the additional risk and premiums associated with quarterly option expirations.
What advice does the transcript give to retail traders regarding quarterly option expirations?
-The transcript advises retail traders to be aware of the additional risk and premiums associated with quarterly option expirations, but also reassures them that these factors are already accounted for in the market prices.
How does the transcript describe the relationship between market volatility and expected moves?
-The transcript describes the relationship between market volatility and expected moves as closely aligned. Volatility, which is essentially the expected move, is already factored into the market's pricing, which is why the actual moves during quarterly expirations largely match the expected moves based on the VIX.
Outlines
📈 Market Volatility During Quarterly Expirations
This paragraph discusses the impact of quarterly option expirations on market volatility. It highlights the concept of 'triple witching,' a term used to describe the largest quarterly expirations, which are expected to be the most volatile. The conversation explores whether these quarterly expirations are indeed more volatile than other expirations and how market makers adjust their positions to remain hedged. The paragraph also presents a study using 20 years of data on S&P and VIX to analyze the difference in market moves during quarterly expirations compared to an average day. The findings suggest that while there is an increase in volatility around quarterly expirations, the market effectively adjusts for this, pricing in the expected volatility.
🔍 Analyzing Market Adjustments to Quarterly Expirations
The second paragraph delves into the analysis of how the market adjusts to the increased volatility around quarterly expirations. It compares the actual market moves to the expected moves based on the VIX, which measures expected volatility. The study's results indicate that the market does an excellent job of pricing in the additional risk and premiums associated with quarterly expirations. Despite the higher percentage of moves greater than 1% and 2% during these periods, the market's pricing mechanism accounts for this, making the difference statistically insignificant when looking at expected moves. The key takeaway is that while quarterly expirations can be more volatile, market participants are aware and the market reflects this in its pricing.
Mindmap
Keywords
💡quarterly expiration measurements
💡market maker
💡triple witching
💡volatility
💡VIX
💡notional value
💡Delta hedging
💡expected move
💡market adjustment
💡liquidity
💡risk premium
Highlights
The study focuses on the volatility of quarterly option expirations compared to other expirations.
Triple witching, a quarterly expiration, is expected to be the largest in notional value, with five trillion mentioned in the discussion.
Market makers aim to be the counterparty to option positions and remain as hedged as possible by using long and short to cancel Deltas.
The study used 20 years of data from the S&P 500 (SPY) and the CBOE Volatility Index (VIX) to analyze market movements.
The VIX has been around for a little over 20 years and measures the expected move in the market.
The research compared raw percentage moves and multiples of the VIX's expected move for the SPY on a daily, weekly, and bi-weekly basis.
The frequency of market moves greater than 1% was found to be 26% for one day, 56% for one week, and 70% for two weeks.
For option expiration on a quarterly basis, the frequency of moves greater than 1% is notably higher.
Market volatility increases around quarterly expiration cycles, with 2% moves occurring 8%, 29%, and 35% more frequently over one day, one week, and two weeks, respectively.
The market adjusts for the increased volatility around quarterly expirations, pricing in the expected moves.
The study found no significant difference in market moves when adjusted for volatility, indicating markets price in the expected volatility.
Retail traders can benefit from the liquidity provided during quarterly expirations but should be aware of the additional risk and premiums.
The discussion highlights the intelligence of the market in pricing in expected volatility, showing that markets are efficient.
The actual market moves during quarterly expirations show a significant difference compared to expected moves, but this is already priced in by the market.
The study's findings suggest that while quarterly expirations result in more volatile markets, the market efficiently accounts for this volatility.
The research provides insights into the behavior of market makers and the impact of their adjustments on supply and demand for shares during option expirations.
The transcript serves as a valuable resource for understanding the dynamics of market volatility and the role of quarterly option expirations.
Transcripts
quarterly expiration measurements
quarterly expiration measurements
interesting piece it's a new market
measure sponsored by the sibo let's see
what we got Market maker today's today
is triple witching it is the quarterly
expiration so we found we thought it
would be fun to take a look and see how
much more volatile is quarterly
expiration from all other expirations
daily weekly monthly whatever you know
how how is this day different from all
other
that's right that's right market makers
do their best to both first to be the
counterparty to whatever option position
Traders wish to take and then second to
remain as hedged as possible typic
typically by using long and short to
cancel Deltas from their option
positions because of this in principle
market makers adjusting their option
their option expiration dates might have
an outsized impact on supply and demand
for shares because quarterly option
expirations are typically the largest in
notional value today they were talking
about five trillion weren't
they notional this yeah we would expect
this the biggest ever right yeah we
would expect this to be noticeable as
March quarterly expiration is near has
this period been measurably different
for the overall Market has this period
of triple witching and then coming com
up the quarterlies in 2 weeks has this
been noticeably different for the
overall market like is there going to be
more volatility what do you think from a
volatility standpoint you're going with
now right volatility market movement yes
I'm gonna say no Thomas I'm G take a
shot I don't really know I didn't really
know either let's go to the next
slide so we did a study we used 20 years
worth of data in the spy and the vix I
think the vix oh yeah the vix has been
around for a little over 20 years right
we considered the Spy daily weekly and
bi-weekly moves both as a raw percentage
and as multiples of the Vic's derived
expected move so we looked at them
basically just raw moves and whatever
the expected move was as as dictated by
vix all volatility is is just another
word for expected move we contrasted
these results from the past 80 quarterly
option expiration dates to the overall
values so basically you know 20 years
four quarterly expirations 80 different
we had a set of 80 different numbers
okay let's take a look and see how much
difference there was if there was any
difference at all between you know
whatever given the size of the moves we
looked at a couple different things here
we looked at overall on moves greater
than 1% and overall
on moves greater than 2% all right first
how many moves overall one day moves are
greater than 1% I was surprised by this
but it's 26% of the moves one week it's
56% of the moves and over two weeks you
know talking about moving 1% it's 70% of
the time so we move around the markets
but for option expiration on the
quarterly basis how often was it a lot
more maybe because we have them every
month now or something I don't no these
are these are quarterly expirations no
no I I get that but maybe because you
know listen when I first started trading
we only had quarterly expirations but
now that we have an expiration basically
daily basically weekly basically you
know monthly maybe they just kind of all
blend in because it doesn't seem like
it's uh I would think I would notice
that kind of number this is very
interesting because it's a little bit it
shows that with one greater than 1% move
you're going to have a much higher
percentage on getting into quarterly
expirations which is by the in two weeks
so let's talk overall 2% moves 2% moves
happen in the market on a daily on on a
one day basis two 7% of the time one
week 29 and 43% of the time over two
weeks 2% just to give you an idea is 100
S&P points that's pretty big yeah and
then when you look at
opx quarterly Opex it goes up yeah it
goes up from 7 to 8 from 29 to 35 and
from 43 to 60 um um so there's
definitely more volatility
around the quarterly expiration cycle
now sure because we also measured this
in with vix you know does the
market adjust for it and because we're
able to do this of course it does yeah
yeah yeah you know like this isn't we're
not showing you something that's not
already priced in just so you know like
there's no there's no edge here this is
just to know that there's a little bit
more volatility coming right around the
corner so now we take a look at all the
overall moves again just like we did
just like we did before but now we look
at it verse overall expected and then
just overall because we didn't look at
just every move combined right we only
looked at plus one% I mean plus one
times and two times and then we see here
which is which is quite interesting is
that when we take all the moves there's
just a incremental difference it's is it
a little bit greater sure does the
difference between 26 and 28 make a
difference nah I mean 27 29 not really
it's not really something that's
necessarily tradable when you look at
overall 2x expected versus overall
versus Opex
expected um the difference is again
statistically insignificant so when you
combine when you take all the numbers
combined and you look at it on an
expected basis or what actually
happened um on the expected basis it's
pretty much spoton which means that
volatility has adjusted right if you if
you go back one slide Beth just for a
second this is this is this is actual
right so when you look at the actual
thing what happened there's a big
difference between the two but when you
go to the next slide this is where we'd
use this is where we use volatility so
no go next slide so this is what the
expected move is remember we measured
adverse volatility so volatility is the
expected move so when you look at it
verse expected move what what the
research team was trying to show you
here is that when you look at expected
move it's correct when you look at it
vers historical moves it's greater than
so all we're saying is the market does a
perfect job of pricing
everything like every time you think oh
I found something where there's some no
it's priced perfectly yeah no I get it
okay yeah sometimes that's kind of hard
for people but that's no no it is kind
of hard it's a great point to make yeah
expected move is what volatility tells
us that's where we measured against the
vix the actual move is what we the first
piece that we did so takeaways in
absolute terms quarterly expirations did
seem to result that was the first slide
did seem to result in more volatile
markets than an average day but when
adjusted for volatility derived expected
moves
the difference largely went away so
while quarterly expirations are an
active time in the market and they can
be good for retail Traders from a
liquidity perspective Market
participants need to be aware of the
additional risk and premiums but they've
been adjusted accordingly because the
market already knows that that's how
smart markets
are it's smarter than the average bear
yes
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