re: Market sell off 12/20/23

I did sell some positions where I had bought high and finally was able to get over from under them with some profit on things I didn't love.

Held all the blue chips.

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For those scratching their head watching this move today, this is what happens when $1.3T worth of derivatives expire on triple witching (which were hedged by the dealers buying the underlying while they sold calls) and the major VIX expiration cycle which expired today.

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I thought triple witching days always occurred on a Friday each quarter, specifically, the third Friday of March, June, September, and December.

If that's still the case wasn't triple witching day for this month last Friday?

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I thought triple witching days always occurred on a Friday each quarter,

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That has always been my understanding.

Today was Vix expiration. Friday was quad witching. Bourbon dad is on the right path, he’s definitely listening to Cem Karsan, who is a very smart guy. I tend to agree with him. Could get a couple more days down but feel strongly we rip into mid Jan, then, watch out

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That’s correct. It’s on a Friday but typically the hedge unwind starts the following week.

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If the stock options monthly contracts expire on the third Friday and the stock index options expire monthly on the third Friday and stock index futures options expire once a quarter on the third Friday, why would the hedge unwind start the following week after those instruments became worthless the previous week? Wouldn't the hedges have expired last week in this case?

I guess I misread your original post in this thread but it sure sounded like you were saying today's volatility was because today was triple witching day for December so traders were scrambling to close their positions.

Because there is so much notional exposure it becomes a massive pinning force. Gamma vanna and charm all create buoyant supportive pinning forces into expiration. It’s a few days after that the unwind is felt. Keep in mind dealers aren’t just going to dump it right away. Why dump it if people just buy more calls for the next cycle? They wait a bit, see if people want to continue the fuel and buy more calls, or if they do nothing, or buy puts. In this case it looks like participants are doing neither which leaves their book massively exposed to downside risk and they have to get rid of it at some point.

This had little to do with traders closing positions and more to do with option sellers needing to unwind their hedge on short calls that expired Friday.

And yeah I follow Cem but been trading hedging flows long before I found him. I stumbled onto delta hedging flows purely through observation and selling options myself.

Ok but you said the unwind typically happens the week after, which is incorrect. Now you say it happened diff this time bc of a specific occurrence that isn’t typical…

We are of the same mindset but that didn’t add up

I was referring to major notional expirations like triple witching where we get huge gamma pinning.

You’re right though it’s complicated. Moneyness (gamma), volatility (vanna) and time (charm) are massive second order derivatives that provide the vast majority of the liquidity we see.

So it depends how far the current price is from the major option strikes (gamma), how volatile the markets are (vanna), and the timing of VIXpiry relative to opex (charm). All three affect how dealers buy and sell to hedge the record option volume last couple years.

Thanks for clarifying. I’m with you though. This down move likely sets up a sling shot into mid Jan. Huge ripper. Then we get a dip into feb. I think 2024 will be a solid year but maybe rotations out of tech into small caps. Then who knows for 2025. Merry Christmas!