As the snow continues to fall Thursday morning in New York City, I am wondering whether we will be faced with another deluge. Friday sees a "quadruple witching" for the markets, a situation that only occurs four times a year.
There is some misinformation on the internet, so be careful, but just to be clear: A quadruple witching day for the market is one in which stock-index futures, stock-index options, single-stock options and single-stock futures all expire on the same day.
That day will occur Friday, as it does once a quarter. I have traded options personally and primarily for my own account for the past 20 years, and I look forward to quad witch days.
As this article from MarketWatch notes, quad witch days have tended to be non-events in terms of price movements, since the phenomenon first began with the advent of single stock futures trading in 2002. But, let's not make the mistake of thinking "there's no there there."
We are in a time of both elevated volume and elevated valuations (the S&P 500 sits at a generational high in terms of forward price-to-earnings by my figuring; I'll have more numbers from FactSet's Earnings Insight publication in my next column). A quick check of the Chicago Board Options Exchange's data shows that cross-exchange volumes remain elevated in December vs. 2019's averages and early-2020 levels. We will likely not see a return to March's blow-out levels again, but the charts I do for my firms show clearly that we are at an elevated state of activity.
That's a lot of churning, and I am sure the ease of trading on platforms like Robinhood and the constant stream of blowhards bloviating in the financial media about how great things are in the U.S. economy with vaccines being rolled out and a stimulus package deal imminently agreed upon -- despite another horrible initial jobless claims figure form the Bureau of Labor Statistics on Thursday morning -- add to this. Idiots say idiotic things, and the job of smart people is to ignore them. This market is as overvalued as I have ever seen it. I was following auto stocks in London during the Tech Bubble of 1999-2001, so was somewhat insulated from the mania, but I saw what was going on ... and I enjoyed the crash. Yesterday's "dot-com'' is today's "disruption," and the idiots who try to make excuses for ridiculous single-stock valuations misunderstand the very cash flows that form the basis for the valuation for anything from a lemonade stand to Apple (AAPL) .
So, in 2020, we have a lot of stupid people saying stupid things about the stock market and a lot of traders backing that up with volume, which is actually not stupid at all. Commissions on equity trades may have gone the way of the dodo bird, but payment for order flow is very much still en vogue, so volume is still important for market-makers. We have had it in 2020 and, since March, it has been primarily to the upside.
The percentage play in such a market is to, as gamblers say, "fade" it. Take the other side of the trade by buying put options, which, owing to a relatively low Volatility Index, are cheap relative to historic norms now, The confederacy of dunces that live in Washington with Fed Chair Jerome Powell and his cronies soon to be joined by the unwanted return of Janet Yellen, who was, frankly, even worse than Powell from a fiscal responsibility standpoint, make shorting anything very difficult. But Wall Street always moves in cyclical fashion, and Friday's quad witch will mark the end of 2020's supercycle of liquidity through a snow-blower and the peak of working-from-home insanity. I am looking forward to some good old volatility -- which, mathematics would tell you, can only come from downward moves, not upward moves -- and I will be playing that Friday ahead of the shortened Christmas week. It is time we all woke up from our winter slumber.