Market On Open, Friday 20 September

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Q3 Opex Today

by Alex King, CEO, Cestrian Capital Research, Inc

Today we have Q3 opex which normally would be a Big Ole Deal but because of the Fed Gift From On High yesterday, nobody is watching opex. Now, that's a shame, because if investors have been positioned bearishly into quarter end - that's logical for Q3, which is typically troublesome - then they will have been buying plenty of puts. Which means that options dealers will have been selling plenty of puts. Investors short, dealers long therefore. Dealers don't want to be long or short, they want to be neutral, making money on the bid/ask spread of the securities in which they make a market. So those same dealers selling the puts (going long) have to hedge those positions by selling the underlying stock or future (going short). This means that if investors are positioned heavily on the put side into options expiry, once those options expire, the dealers have to rebalance their books. This means the short stock or futures positions they have must be covered (ie. the dealers have to buy positions in the stocks or futures). This kind of dealer short-covering can provide an impetus to the upside. This is why, for instance, Q1 2020 saw such a violent move up at the end of the quarter; the same for Q1 2009. When investors were at their most worried, and were most heavily weighted down with puts, the unwinding - the re-hedging - of dealer books to the long side gave the market a giant shove upwards. These big violent reversals can cause momentum - FOMO - all of their own. So it is always worth watching quarter end option expiry days.

For more ways to use the options market to understand the equity market - take a look at our options service - here.

Short- And Medium-Term Market Analysis

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