Triple Witch and SMCI Converge Today

    Date:

    Today is a crucial expiration, particularly for holders of SMCI and its options.  Spoiler alert – don’t turn off your screen for the weekend when the market closes.

    Did anyone remember (or care) that today is a triple-witching Friday?  Sure, they’ve been overshadowed by weekly and now daily expirations, but it is important to keep in mind that EVERY options class has so-called “zero-dated” or “0DTE” options on major expirations.   That’s always been the case, by the way.   Over a year ago, when those options came to the fore, I asserted that there is nothing systemically different about 0DTE options.  We’ve simply compressed the normal expiration cycle for a narrow list of options classes. 

    But there is one thing that is extremely important to today’s quarterly expiration, and that is the rebalancing that will occur after the close.  Super Micro Computer (SMCI) and Deckers Outdoor (DECK) will be replacing Whirlpool (WHR) and Zions National Bank (ZION) in the S&P 500 Index (SPX).

    SMCI has been a truly magnificent stock, and it will culminate its parabolic advance with its addition to the S&P 500.   The chart below shows just how spectacular SMCI’s rise has been – particularly in the short year-to-date so far.  The two seeming flat lines at the bottom are the Nasdaq 100 (NDX) and SPX, which are each up about 7% during that period, while the “laggard” in the middle of the chart is Nvidia (NVDA).  It’s not normal for stocks to nearly quadruple in three months!

    3-Month Chart, SMCI (red/green daily candles), NVDA (purple line), NDX (blue line), SPX (white line)

    3-Month Chart, SMCI (red/green daily candles), NVDA (purple line), NDX (blue line), SPX (white line)

    Source: Interactive Brokers

    It is important to note that roughly $11bn in market cap will be leaving the index (WHR + ZION) while about $85 bn will be going in – over $60bn in SMCI alone.   Since index funds need to match SPX’s composition when markets open on Friday, they will need to sell plenty of stock to accommodate the new entrants, which will be far more heavily weighted than those exiting.  The need for index funds to sell some combination of 500 stocks in order to buy two is a likely factor behind today’s downdraft. 

    It will be imperative that options traders keep an eye on not only the close, but the aftermarket activity in SMCI.  Bear in mind that index funds utilize market-on-close orders to ensure that their rebalancing occurs at the final closing price of SPX.   It is therefore very likely that the stock could jump sharply at the close when index funds culminate their buying.  It is also not improbable that the stock could have a meaningful move after the close, potentially to the downside.  That makes it imperative for those with expiring options positions in SMCI (or anything else with an outsized move on the close) to keep an eye on the aftermarket activity of the shares.

    Keep in mind how options expiration works.  While I recommend re-reading a detailed primer that I wrote for this site, it is important to remember that OCC (Options Clearing Corp) automatically exercises any equity options that are at least one cent in the money AT THE OFFICIAL CLOSE.   As I type this, SMCI is trading around $1100.  If we were to close at $1100.01, all calls with strikes of $1100 or less will be automatically exercised, as will all puts with strikes above $1100. 

    BUT!!!  The holder of an option retains the ability to exercise or lapse it at their discretion.   Remember – an option conveys the right, but not the obligation, to buy or sell (call vs. put) a stock at a given price on or before the option expires.  And that decision does not need to be made until sometime after the close.  At IBKR, we accept “contrary” exercise instructions until 5:25 EDT (which is later than many of our competitors).  Here is why that is crucial.

    Let’s say that SMCI rallies up to $1155 at today’s close but sinks back to $1125 afterwards.  If that occurs, those who are long $1150 calls may want to lapse them, while those who are long $1150 puts may want to exercise those.  But you need to tell us if that is your decision, because they will be exercised (or lapsed) unless you tell us otherwise.  Understand how to submit instructions and make your decisions based upon whether you want to go home long or short after you see the post-close reaction to the index addition.

    By the way, those who are short options need to be especially vigilant about potential surprises.  A significant post-close move could result in someone expecting options that might seem to expire worthless based on the closing price, to get exercised nonetheless.  The safest thing to do, of course, would be to close out near-money short positions.  But if not, you may want to consider pre-emptively hedging positions that might get assigned based upon aftermarket activity.

    Disclosure: Interactive Brokers

    The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

    The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

    Disclosure: Options Trading

    Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ

    Go Source

    Chart

    Sign up for Breaking Alerts

    Share post:

    Popular

    More like this
    Related

    Trading 0DTE Options with the IBKR Native API

    The article “Trading 0DTE Options with the IBKR Native...

    Highlights from the IBKR Quant Blog – March 2024

    Be sure not to miss the latest articles on...

    Bullish Market Outlook As Inflation And AI Sector Energize Stocks

    What’s going on here? After dodging a few economic curveballs,...

    How Can I Find Really Bad Seasonal Patterns?

    As an investor, you may well naturally prefer to...