Why Futures and Options Expirations Won't Boost Wall Street

With the pervasive investor uncertaintly, the so-called witching hour, a time when futures and options expire and investors usually make more trades, is unlikely to boost trading volumes Friday.The "quadruple witching" hour -- when index futures, index options, equity options and security futures expire simultaneously -- is traditionally a time of higher trading volumes and investors decide what to do next. But if the low trading volumes so far this week are any indication, the next quadruple witching hour, scheduled Friday, will likely pass with barely a bump.

The investor uncertainty that has characterized the market's choppy performance seems to be going strong. For the entire month of September, investors have behaved as if someone cast a spell rendering them unable to rally or retreat from stocks.

The market has been stuck in a small trading range of between 1040 and 1130 on the S&P 500 ($SPX) index for the last four months. And there's been a lower-than-normal volume of stock and options trades as investors try to figure out which way the market might head next. Even the approaching quadruple witching hasn't been able to energize traders.

"We are at a point where the economic numbers are a little bit better, but they are not good enough to convince the buyers or sellers to take a stance with any kind of conviction," says Nate Peterson, senior derivatives analyst for Charles Schwab. "It's a market where you continue to wait and see. As the [reports] come out, you look for indicators that will give you a reason to buy, or to short the market."

Waiting for News

Options investors seem to be waiting for news and economic reports to help them reassess their positions before making trades, Peterson says. As a result, the average options volume in September has slipped to 15 million contracts per week from the 20 million contracts per week the market averaged through May.

That options volume may stay low until closer to October, when companies may begin making announcements in advance of the earnings season, Peterson says. Those announcements may then give investors better clues to where the market is headed. Unfortunately, while providing some clarity for investors, those announcements can also create higher market volatility.

"Right now VIX futures are around 25 – so traders are not pricing in a lot of volatility for October," Peterson says, referring to the Chicago Board Options Exchange Market Volatility Index ($VIX), which measures the market's anticipated volatility based on the sale of S&P 500 index futures and options. Historically, volatility has usually grown during earnings seasons, and an increase in the market volatility index generally makes options and futures more expensive, so Friday may be traders' last chance to lock in positions before higher volatility -- and higher prices -- kicks in.

Leading up to the quadruple witching, some traders bought new options on Wednesday and Thursday, but it seems that most are waiting until next week to decide if they need options to protect their long positions. Those who choose to buy put options for that protection as earnings season approaches can likely get them cheap, relatively speaking, on Friday, Peterson says.

And getting cheaper protection would definitely take the hex out of quadruple witching.

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some1do

We are overbought for the short term, and on the long run, stock prices are a bubble. We have not seen the bottom back in March 2009. Dividends, PE ratios will be starkly different at a true long term bottom: ************************************** http://www.kondratieffwavecycle.com/stock-market-big-picture/ Nothing has been fixed. Stimulus was borrowed from the future. Debt was the problem to begin with and we have more of it now. Borrowing and spending does not make a recovery. Soon interest payments on debt will be enough to kill any recovery as you know it. Deflationary crash is coming. Individuals, state, local, federal governmers will not have disposable income left to spend. This is the mother of all crashes. 2008 was just the warmup.

September 17 2010 at 2:35 PM Report abuse rate up rate down Reply
sjoberdix

With record foreclosures, unemployment 9.6% and millions force into poverty with no hope in sight this market will never recover.When you have a process failure or a catastrophic failure the first thing that needs to done is to stop preceding immediately, then you contain and flush the system of any non-conformance. Get to the root cause, put controls and detections in, and assign responsibility. This applies to all systems. Wallstreet and Gov. failed comply to these standards, yet main street and the labor force honorably hold them up. Wallstreet and the bought politicians need to be shut down now. Not on election day. To prevent this from happening again. We the people will be better off with them shut down than spending good money on fail policies. They're stating that we need them but offer no evidence to that fact. No where in our Constitution does it state that our tax dollars should go to TARP. Article II Section. 4. The President, Vice President and all civil offices of the United States, shall be removed from office on impeachment for and conviction of , treason, bribery or other high crimes and MISDEMEANORS. Bribe; to influence or induce by giving illegally or IMMORALLY, token anything of value for a service. Campaign contribution from wallstreet, special interest and lobbyist are in fact bribes. Also, Article I Section. 8. The congress shall have power to lay and collect Taxes, duties, Imposts and excises to pay the debts and provide for the common Defense and general welfare of the United States; To establish , post offices and post roads. No where does it say they can give our tax dollars to wallstreet when our roads and bridges are in such despair. Clearly the Feds and congress are in total violation. Its time for all to be held accountable for their actions.

September 17 2010 at 5:28 AM Report abuse rate up rate down Reply