Watch This Before You Buy Options | Options Backtest

Summary

The 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.