Strategist on quadruple witching: I wouldn’t be eager to participate in stuff that expires today

Steve Sosnick, Interactive Brokers Chief Strategist joins the On the Move panel to discuss the markets reaction to quadruple witching.

Video Transcript

JULIE HYMAN: And now let's get back to something equally chilling perhaps, witching, at least the name of it is. Quadruple witching is happening today in the markets. That means the expiration of certain kinds of futures and options contracts. This tends to mean an increase in volatility, an increase in volume potentially. Steve Sosnik, somebody who knows quite a lot about this. He's Interactive Brokers' chief strategist. He's joining us from Connecticut.

And, Steve, what is going to characterize perhaps witching today is there a lot of expirations of single stock contracts, right, perhaps because of the Robinhood trader effect, and this is a little bit unusual. So how is this witching maybe going to look different from past?

STEVE SOSNICK: Well, first of all, good to see, Julie. The-- this-- this is going to be a bit different. Now, we-- we have passed through the-- sort of the eye the hurricane because we had futures and index products expire on the open. And you'll notice this morning there was a brief try to ramp of the futures beforehand, but it didn't really amount to much and we came right back off. That tells me that the action was not in the futures, in the futures options and-- and the index options.

And as you say, the-- but the open interest is-- is enormous of-- of options that are expiring, probably about 90 million contracts or so, and those are primarily in individual equity options. Now, the vast majority of those calls which were purchased where we-- where we actually flipped the skews, many of them are actually way out of the money now. So they're not going to come into play so much unless something happens and we get some insane rally by the end of the day.

But more likely what happens is you want to be focusing on the strikes that have a lot of open interest in them that are around the money because option strikes tend to act like magnets. They either attract or they repel. And every time you cross through a strike that has a big open interest, there's a lot of people who have to re-hedge their positions.

So, for example, today, some of the stuff I had m eye on are, like, you know, SPDRs, 260-- I'm sorry, yes, SPDRs around the money, Skew QQQs 265, 270 line, that kind of thing. And those are the lines that I would be sort of keeping an eye on right now because-- it depends who owns the contracts, but this is when you can get some real volatility. Because if TheStreet is short, they need to-- they need to do the opposite of what's good trading practice, which is sell low and buy high, and that's being short gamma. That can be painful.

ADAM SHAPIRO: Steve, it's good to see you. It's Adam. And I understand why less savvy unintelligent-- people like me-- investors are told, just watch from the sidelines on a day like this. But you just talked about the ability to attract people back in based on the issues we're talking about. How long should someone like me say, I-- I can't even fathom this because I don't comprehend it the way I would need to. I could lose a great deal of money if I were to react to this. How long do you sit out? How long do you watch?

STEVE SOSNICK: Well, you can-- you can participate, just I wouldn't necessarily be eager to participate in stuff expiring today because that's the-- that's the sort of stuff that, you know, falls into crapshoot territory. Remember, one of the characteristics right now is a lot of the people who've been buying these calls are people who migrated to the options game as-- as a result of when sports were closed.

So the pay-off in option trading is-- is a lot like that of sports betting. You-- you make a leveraged bet, and it-- it pays off big if you win, and it-- and you lose all your-- you lose all your money if you lose. I-- I get the sense you don't have that constitution, Adam. So I'm going to say that-- that you should-- that doesn't mean that you shouldn't be using options either for income or for hedging further out, but it just means today just you may want to sit back and-- and see what happens in the volatility.

And-- and today is probably a day more to be looking where you want-- want to be, entering or exiting your stock positions based on movement, but not necessarily trading the options that expire today. There-- the risk reward is-- is really difficult to handle.

SIBILE MARCELLUS: And speaking of volatility, all eyes on election day, of course. Very important for investors. What can we expect in terms of volatility the week of the election? So from November 2 through the end of the week, something that, you know, everything will be decided on November 3, possibly it'll take an entire week. What can investors expect there?

STEVE SOSNICK: Well, Sibile, this is what's interesting is the-- the VIX-- the VIX has a futures curve, and so we-- we can extrapolate and see. VIX is a 30-day look ahead of volatility, and then we can look at the markets different 30-day look aheads at different points in time. I know that sounds-- that sounds difficult to follow, but.

So basically, the October VIX futures represent the election, and those are-- those have-- are way above the current level right now, probably three or four or five points higher. They had been the highest point in the VIX curve more or less all year because everybody figured there'll be some-- there'll be some volatility around election day. That's-- that's relatively normal to expect.

What's kind of crazy is the November VIX futures have crept above the October VIX futures. Now remember, the November futures expire after the election. And the-- and the December futures are about as high as the October futures. So the market is telling you they're worried about something, whether or not it's the specifics of election day or the potential for some sort of contested election and wildness thereafter.

Or the flip side is, you know, if-- if it looks like the-- if it looks like the Democrats are on the table, there are some who are worried about the return of capital gains taxes, which might incentivize investors to sell prior to the end of the year to avoid those taxes. So there are a lot of post-election dynamics, and it's kind of moved beyond just being worried about election day to being worried about pretty much the whole fourth quarter and maybe into the beginning of the first. Even-- even January has some vol in there, which is around inauguration. So take that as you will.

JULIE HYMAN: Buckle up, that's how I'm going to take it. Steve Sosnick, thanks so much. Interactive Brokers' chief strategist. Always great to talk to you.