In the casino that is Wall Street, much chaos can ensue on quadruple witching day when stock index futures, stock index options, stock options, and single stock futures all expire. This happens four times a year and today could be exceptionally volatile as events could trigger a massive selloff. Speculators (because they certainly aren’t investors) are short SPX puts at around the 2000 level. If the SPX drops below those levels, it will trigger mass selling of SPX futures to hedge, causing a selloff.
And of course determined traders and algorithms will try to force the price down so they can benefit. This is primarily done by computers making thousands of trades per second. Any relation between this and a rational stock market is, of course, coincidental and illusory.
Meanwhile, the PPT (The Fed’s Plunge Protection Machine) might intervene to stop carnage, adding to the unreality. Waitress, bring me another drink. I just know my slot machine is about to pay off big.
The problem is that since over the past 7 years, the entire market has become one giant stop hunt, the very algos which “provide liquidity” will do everything they can to inflict the biggest pain possible to option holders – recall that for every put (or call) buyer, there is also a seller. As such, illiquid markets plus algo liquidity providers makes for an explosive cocktail at a time when the Fed is already worried whether the Fed may have engaged in “policy error.”
It further writes that “as SPX moves below these levels market makers who are short these puts would be forced to sell spot futures to hedge, which could exacerbate a market selloff.”
In other words, selling which begets even more selling, which begets even more selling.
So, there might be carnage. Or not. One thing is for certain. Our stock market is gamed, manipulated, and for small investors, probably offers worse odds than playing the slots in Vegas.