Start the conversation
Good morning! Shah Gilani here.
I've got information you need to help get you through expiration day. Something big is about to happen, something that could affect the markets today, on expiration, and next week, if not longer.
A lot of options positions are about to expire, and I'm going to give you the most important facts on what's about to happen. Friday, March 19, 2021, is the first Quadruple Witching Day of the year, and it could make waves.
Why is it important? Because stuff is happening now that didn't happen back in 1982, when I was a market-maker on the floor of the Chicago Board Options Exchange. Back then, the markets were fresh, and the derivatives just started to pick up speed…
Options were just coming into the limelight, but they're everywhere now.
And because of it, pretty much everything has changed, and it dramatically impacts everybody's trading today.
So, I'm going to tell you exactly what's what with Quadruple Witching Day. I'm going to talk about options, Delta and Gamma, which may sound complicated, but I promise you'll think it's as straightforward as I do by the end of this.
Shah Gilani's video message to his Total Wealth readers on Thursday reveals exactly how today's quadruple witching could cause an epic "melt up" in the market.
The Real Driver of Last Summer's Rally
Let's start this off with an example. This happened. You experienced it. I experienced it. The markets experienced it this past summer. The summer rally we had was phenomenal. There was a reason for it. It wasn't just a willy-nilly "let's go buy stuff!"
What happened was a whale, a really big player who's capable of making really big waves that people didn't even realize was out there, started buying.
The whale was Softbank.
Masayoshi Son, the Japanese multi-multi-multi-billionaire – almost like the Warren Buffett of Japan – who owns a ton of tech companies was in hot water. WeWork, which was one of his companies, imploded. Wirecard imploded, too, and his reputation was at stake. So, he needed to do something.
He had hired two ex-Deustche Bank employees, two superstars in my opinion, to run his investment management arm and Softbank's Vision Fund, the $100 billion Vision Fund that mostly invests in tech startups.
And these two guys started scheming and hatched a genius plan. Here's what they did.
They went into the public markets, and they started buying hot stocks, stocks that they knew had a lot of retail investor interest. Stocks like Tesla, Apple, Salesforce, Zoom, and so on. They bought billions of dollars' worth of stock and billions of dollars' worth of call options on those stocks.
A call option is a bet that the underlying stock the call option contract is based on will increase, benefiting the call buyer as the price of the calls they own increases. A pretty simple, straightforward trade.
The beauty of their trades was, as they were buying more and more calls – after they bought stock that is – they were drawing a lot of attention to those stocks, which further raised the prices. There was a domino effect – drawing the attention of retail investors en masse brought in a lot of institutional investors, so what the Softbank guys started lifted all of these great tech stocks higher and higher and higher.
Now here's where the geeks and Greeks come in – the geeks being me and the Greeks being Delta and Gamma.
When a call option price rises, it's relative to the underlying instrument, the underlying stock. The relationship between the price of the option and the underlying stock is called delta. So, a delta of one means that if the price of the underlying stock goes up a dollar, then, theoretically, the value of the option will also go up a dollar, if the call option is "at the money" or "in the money."
That's all delta is. The price of the option and underlying stock move together in a ratio that can go as far as one-to-one.
Delta is also used for hedging. So, if you have a stock position, you can use delta ratios to determine how many options you'd need to buy or sell to hedge. This is a fairly common strategy.
Then there's gamma. Gamma is the rate of change of delta. Delta is the relative relationship between the underlying stock price and the option price. Gamma is what delta is doing, or how it's changing, and what its rate of change is.
Why is this so important? Well, because all of the people who are buying all these calls alongside Masayoshi Son's people, all the retail traders who are buying calls and bidding up the call prices are affecting interest in the call. So, more people are coming in buying more calls, and they aren't stopping.
And who are the folks selling droves of traders their call options? Those are market makers. Only they aren't guys like me anymore, now most market makers are machines programmed by guys with advanced mathematics and engineering degrees.
Like I said, I used to be one of those market-makers down on the floor of the CBOE back in the '80s, but now almost all of it is mechanically done. So, the big market-making firms, like Citadel and Goldman, have machines that monitor this stuff, and they sell the options (of course they buy them too).
That's what market-makers do, they make a market, they both buy and sell the options, or stocks, or whatever it is they are market-makers in. And with this summer rally, with prices going up and up and up, the market makers themselves were taking on more and more risk.
That's because it was market-makers selling all those calls, watching prices soar on the underlying stocks and on the call options they were actually "short" on, and then had to confront the fact that they are losing money. So, what do they do? They hedge.
They always have to hedge, because that's the nature of the business.
You're not going to be completely at risk. The market-makers use gamma, the measure of the rate of change of the delta, to figure out how much to hedge. Gamma hedges usually imply that they're not going to buy the calls as they hedge; instead they will buy the underlying stock. In doing so, that lifts the price of the underlying stock which, in turn, lifts the price of the call options they're short. Yes, you can think of it as a short squeeze on the market-makers, a la GameStop.
It became a melt-up, and Masayoshi Son's peeps started it. A gamma melt-up that gave this past summer a spectacular rally. Nobody knows the real numbers, but Masayoshi Son supposedly invested about $4 billion. It's estimated after they squeezed the market-makers into buying underlying stock to gamma hedge, forcing them to lift the price of those stocks and the value of all the call options Softbank bought, the trade made a profit of at least $4 billion. Some people, me included for sure, think they made more like $10 billion.
A brilliant play! It was a complete set-up to take advantage of what the market-makers have to do, which is gamma hedge.
And guess what? It's happening again. It's going to continue happening. But right now, it's happening because today, March 19, is quarterly options expiration.
This Is Why Quadruple Witching Matters to Anyone in the Market
We've had a nice rally. We had a Fed meeting. People were a little nervous. Some people thought that the Fed would say something markets didn't like, but they said they were going to keep interest rates low, which is what a lot of traders were betting on. There were lots of bets, call options bets, that the S&P 500 would get to 4,000. Others bet similarly on the SPY ETF that tracks the S&P 500.
Billions of dollars are being bet as we speak.
If the S&P 500 hits 4,000 any time before the end of today, all those dealers who are short gamma are going to have to continue buying baskets of stocks, sometimes all 500 stocks in the S&P 500, just to hedge against the losing positions they have on all those call options they sold.
We could see another melt up by the end of today, depending on whether the markets move in the direction of call buyers. If we get to 4,000, it's going to be pandemonium. These market-makers are going to have to buy more and more stocks, and all the call buyers are going to make a fortune.
Right now, we're not there because the market isn't there and we don't know if we're going to get there. That remains to be seen.
The backside of the expiration is that, if we don't make it, if the S&P 500 doesn't get to 4,000, if SPY doesn't get to 400, if those strike price calls so many people bought don't go "in the money," all those call options are going to expire completely worthless.
The market-makers will go, "Thank goodness! We got close to losing our shirts, but we ended up just fine."
But guess what? In the process of hedging, they bought millions upon millions of shares in all of those stocks. That was the gamma hedge, right? But then what will they do with all those shares they no longer need?
They're going to have to start getting rid of them. And next week could be a very volatile week. Things could turn down very quickly, but a lot remains to be seen.
Right now, it could go either way.
In the case of my Softbank example, the market went up, and then when everything was done and expiration was over, the market just came right back down. It was gentle, but it can happen very quickly.
This is what you need to be aware of. This is what's happening today and next week. So, stay with me. I'm going to tell you how to play this in the future, because this will happen again and again.
Every options expiration time, it's going to happen, and there is money to be made if you know how to play it. I'm telling you what's happening. But in the future, I'm going to tell you how to get in on it before it happens.
And it doesn't end there…
You see, we can set ourselves up to profit on these events, but with the Biden-Harris wealth wipeout on the horizon, it'll be harder to pull off if you're not prepared.
That's why I created for you the 2021 Financial Freedom Action Plan, to help prepare you for what comes next.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.