A recent phenomenon that has been making waves is the peculiar performance of the S&P 500 on Triple Witching days. Over the last 15 occurrences, the S&P 500 has experienced declines in a staggering 13 instances. This raises questions and piques the curiosity of market participants and analysts alike. What could be driving this pattern, and how does it intertwine with the surging volumes in the world of options trading?

Understanding Triple Witching

Before delving into the intriguing connection between Triple Witching and options trading volumes, it's essential to grasp the concept of Triple Witching itself. Triple Witching occurs on the third Friday of March, June, September, and December, when three different classes of derivatives contracts expire simultaneously. These include stock index futures, stock index options, and individual stock options. The culmination of these expirations often leads to heightened trading activity and can influence market dynamics.

The S&P 500's Mysterious Behavior

What sets the recent Triple Witching days apart is the consistent decline in the S&P 500 index. In 13 out of the last 15 Triple Witching occurrences, this widely watched benchmark experienced a drop in value. This unusual pattern has left traders and analysts scratching their heads, searching for an explanation.

Enter the Soaring Options Volumes

Adding an intriguing layer to this narrative is the substantial surge in options trading volumes observed since 2019. Options, including the now prominent 0DTE options, have become a significant driver of market activity. This surge in options trading volumes has not only provided new opportunities for market participants but has also introduced complexities that warrant attention - Perhaps a real “tail wagging the dog” moment for markets.

Unraveling the Connection

Now, let's piece together this puzzle. The massive surge in options trading volumes, coupled with the consistent decline of the S&P 500 on Triple Witching days, suggests an intricate interplay between these two factors. While correlation does not imply causation, it's worth exploring whether the rise in options trading activity these days contributes to the market's peculiar behavior.

As we have discussed in gamma exposure (GEX) and gamma roll-off articles prior to this one, the surge in options trading volumes on Triple Witching days introduces a greater degree of volatility and uncertainty into the market. As traders execute various options strategies to capitalize on the same-day expiring contracts, it can lead to rapid price fluctuations, and as price moves in wide ranges, it draws in a greater audience into out-of-the-money SPX contracts, only fueling the fire to a greater degree. This has to do with how option dealers hedge off risk to remain “delta neutral.” To put it in layman’s terms: As prices fall, retail traders buy puts, as those puts are bought in bigger numbers dealers need to hedge their risk, so they sell the underlying - This results in more movement of the underlying, which only results in more puts being bought.

Conclusion

In financial markets, anomalies and patterns often serve as breadcrumbs leading to deeper insights. The curious case of the S&P 500's consistent declines on Triple Witching days, juxtaposed with the recent surge in options trading volumes, forms a compelling narrative. While definitive answers may remain elusive, this convergence of events makes for a very interesting narrative about the big volatility that we have seen over the past few years. It serves as a reminder that understanding market intricacies is a journey of perpetual discovery - That being said, I maintain that price and price alone is the ultimate arbiter for traders. While I have talked about this in the previous gamma-related articles, this information is interesting but does not necessarily add to a trader’s edge. Only price pays, and despite the volatility, the market still trades in a technical fashion. Price action and supply and demand reign supreme.