Sure,
markets fell a tad today. But to us, the "what" of market action is
never as interesting as the "why," and given that today was options
expiration, we can't help but think of one word: gamma.
Adam posted some nice thoughts about gamma yesterday (1, 2), and he even seems a little prescient with remarks like this:
…another
important point to note about gamma on Expiration Week is that it tends
to feed on itself and keep a body in motion.Take this XYZ before. Let's
say it breaks away from 50 on Expiration week and heads towards 55.
Call shorts on the 55 line probably had a "mental ripup" option on
their books. In other words, a call short that was unhedged, probably
on the thinking it was out of play. Well, guess what, now it is a
factor. They are likely forced into some sort of action like buying
stock into strength, or buying the calls back. Which on the margins
adds even more fuel to the stock. Which maybe triggers the next call
short into action. Which…… you get the idea.
It's
hard to imagine that today's move would have had the magnitude that it
did if not for the gamma factor. It's easy to imagine DIA strikes
getting shot through as people buy back their short puts or sell the
stock throughout the day.
To everyone who whines about
commissions and writes in to moan every time we exit a condor before
expiration - instead of just letting the things expire - this is
exactly why we do that.