Hey Traders,

This Friday is quadruple witching for the S&P 500 …

• • • Stock index futures contracts
    • Single-stock options
    • Options on stock-index futures
    • Stock index options

They’re all set to expire.

These dollars add up to over $3.2 trillion, according to Goldman Sachs:

Between SPY and Equity Options, we have another 1.2 trillion expiring in the afternoon.

Why does this matter?

Because of gamma.

Right now, the Street is positioned long put and short call.

This kind position that looks like this:

Now the buyers of these options are already long the index, meaning their position looks like this when we add in stock:

Market makers that sold this position, though, trade it delta neutral.

This means they are not short futures and short puts and long calls one-to-one, but only to the delta.

Flipping the position and setting it delta neutral the position looks like this:

Now, as the market drops and time passes what happens to the delta and gamma of this portfolio?

For Delta: Options that are out-of-the money lose delta quickly. Options that are in-the-money pick it up fast.

For Gamma: Options that are near the money see gamma explode higher, and options that are out of the money see gamma fall.

But remember, as we approach a strike gamma explodes.

What happens to his position as we approach the 3800 puts?

I am adding in the greeks so you can see:

Start:

3875:

3800

3725

Notice the delta explodes and gamma increases.

And this is 20 contracts!

Look at the open interest on puts for Sept. 16 AM options in SPX:

So here is what happens:

The market starts to sell off …

Market makers need to hedge,  so they sell futures …

This sends the market lower …

More selling ensues …

Market makers need to sell more …

And now Delta and Gamma have taken over …

We are in for a wild week.

Join my team LIVE at 7 p.m. ET on Thursday for how we plan to play it.

Your Only Option,

Mark Sebastian

Founder & CEO
Option Pit