Some investors and traders love to look at past dates and events to see if there is a pattern that can be expected ahead of time. One issue that is rather well known is that the month of September has tended to be a bad month for the stock market in general. Some traders also worry about the effects of quadruple witching day that will occur on Friday, September 18, 2020.
24/7 Wall St. wanted to look into what should be expected for quadruple witching in September of 2020?
For those who do not keep track of witching dates in futures and options, quadruple witching occurs on the third Friday of the months that end each quarter. This is where options and futures both expire on stocks and on the indexes. When quadruple witching really matters is when there are larger than usual dollar amounts in the options contracts outstanding and when the CBOE Volatility Index is higher than normal. It also can create exacerbated moves around unexpected market-moving headlines.
According to the CBOE, the top options exchange, quadruple witching can and does impact how much or how little the stock market moves. The CBOE even noted in back in 2016 that it can impact the whole week’s action, by increasing amounts as the week wears on. The CBOE also noted in June of this year that quadruple witching had almost $2 trillion notional of June SPX options expiring.
On Thursday, the CBOE Volatility Index (VIX) was near 27.50 late in the day. That is much higher than it was back in the bull prior to March of 2020, but the so-called VIX has remained elevated even after going up into the 70s and 80s in March during the peak of panic selling pressure. Generally speaking, the VIX has been stuck in the 20s and has risen into the 30s for the last 60 days.
The CBOE data from the end of day today (9/17) listed total options in the trading volume as 4,605,514 contracts as of the close of the stock market. That was broken down as 2,355,630 calls and 2,249,884 puts for a 0.96 puts/calls ratio. There were wider disparities between these options when it came to equity and index options:
- Index options were 1,420,956 contracts, with 513,585 calls versus 907,371 puts.
- Equity options were 3,184,558 contracts, with 1,842,045 calls and 1,342,513 puts.
24/7 Wall St. reached out to Lindsey Bell, Ally Invest’s Chief Investment Strategist. Her response:
I would just note that while quad witching adds volatility and results in increased volume on the Friday of the expiration, the reaction by the S&P 500 has been relatively muted lately. In the past 10 years, the S&P 500 has declined 0.2% on average the day of a quad witching. There hasn’t been a deviation from that trend in Septembers either (the market has also declined 0.2% on average on Sept quad witching days).
According to Jeff Hirsch of the Stock Trader’s Almanac, the S&P 500 has been up 13 of the last 17 September option expiration weeks. His table shows that options expiration day in September has been down on 7 of the last 10 years. September’s option expiration week was also shown to have risen 60.5% of the time for the S&P 500 since 1982, with slightly less for the Dow and tech-heavy Nasdaq.
Another report was recently issued by Janney’s Dan Wantrobski tracking how sensitive the market is right now to even benign monetary policy changes. He said:
The global market’s reaction against such synchronized (and aggressive) policy accommodation is indicative of how dependent it has become on liquidity infusion. As we have noted in prior reports, any significant changes to central bank policy will likely trigger equity market volatility – but yesterday’s (and this morning’s) reaction to effectively no change shows how sensitive and vulnerable equities are right now – especially given the fact that on a technical basis, many groups (particularly leadership areas) remain overbought/extended on the charts.
A mid-Thursday report from CNBC indicated that both large and small investors have been big buyers of options of late, but was non-directional on the report despite noting that some stocks could move disproportionately in either direction as positions unwind.
One last issue which should be of the largest concerns in September of 2020, outside of Thursday’s close being in the red, is that valuations remain elevated as the S&P 500 just recently hit all time highs again. The S&P 500 was most recently valued at close to 23 times forward earnings for the next year, and even if that is due to many earnings being muted and forgiven for softness under the coronavirus, that is still a very expensive stock market. The S&P 500 may not be as expensive as it was in 2,000 yet, but many sector valuations like tech) have gone sky-high.
The valuations may have come down in some of the tech darlings of the leaders like Apple, Amazon, Alphabet, Microsoft, NVIDIA and so on since the end of August, but valuations remain more than elevated to some investors who have longer memories. Many of the hot new cloud and services companies are now worth 30, 40, 50 (and higher) times annualized revenues for companies that have never once posted a profit.
While Friday’s direction and bias dis not look set in stone as of Thursday’s close, investors should be braced for added volatility around headline impacts for stocks and indexes with actively traded options and with high open interests. The current account balance for the U.S. shouldn’t be a big market mover on Friday, but both Consumer Sentiment (preliminary September) and Leading Indicators (August) could help create exacerbated moves – and 2 Federal Reserve officials were set to speak on Friday morning.