It’s that time again: monthly stock-market options for August are set to expire on Friday, potentially spurring more volatility in stocks after a bruising three-week run.
Monthly options expire every month, but once a quarter — in March, June, September and December — an event known as “Triple Witching” takes place, causing notional value of expiring options to swell as quarterly and sometimes calendar-year options expire along with monthlies and weeklies. Why are dealers short gamma, and what does this mean? As stocks have stumbled, option traders have been buying put options and selling call options. As a result, dealers could be forced to hedge their positions by buying futures if stocks rise and their customers close out their short-call positions, or selling futures to hedge the risk of puts moving into the money.
Gamma is used by options analysts to describe how quickly an option’s delta changes. Delta represents how sensitive the price of an option is to moves in the underlying asset. When options are about to expire, delta typically increases dramatically, since small moves that put it closer to being in or out of the money can have a dramatic impact on the option’s price.
Option contracts give traders the right, but not the obligation, to buy or sell the underlying asset or currency. Often, options tied to stock-market indexes like the S&P 500 are settled in futures or cash. Options tied to exchange-traded funds like the SPDR S&P 500 ETF Trust SPY, which tracks the S&P 500 index, are settled in shares of the ETF.