Market On Close - Friday 19 January 2024

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by Alex King

Remember what we said in this note yesterday?

We said, "[Friday] is monthly options expiry. This means that even more than usual in securities markets - particularly US equity indices and the larger US single-name stocks - nothing is real. Stock price movements in the short term from now till maybe lunchtime Monday will be impacted heavily by dealer hedging flows".

If you understand how options expiry works, and you understand how option dealers were positioned heading into this month's set of expiries, then the banzai nature of today's move won't have come as too much of a surprise to you.

I can tell you that this particular rabbithole - opex and why it matters - was a black hole for me until a couple years ago, when I started to learn about how it is that the options market can drag the equities market around, as if the equities were the derivatives and the options were the primary instrument. It starts with the fact that there is a lot more capital sloshing around in options than there is in equities. And then you have the time-bounded nature of options and the requirement for option dealers to be delta-neutral in their books - which means a whole lot of hedging flows, particularly so at extreme times in the market.

If you’d like to get to understand this stuff faster than I did - it can really help your equity investing by the way, I myself do not trade options but I am a much better equity investors since this black hole became illuminated - then go see Jay Urbain, Ph.D, who runs Jays Options on our Cestrian Stock Symposium platform. In addition to raising your game? You will find also featured - a slew of real-money options trades.

You can read all about Jay’s Options, here.

For paying Inner Circle members we now run through our usual charts covering the main US equity indices, associated leveraged ETFs, plus the SOXL TECL and FNGU ETFs as always. Yet to join up as a paying member here at Inner Circle? You can do so right from the links below.

Note - to open full-page versions of these charts, just click on the chart headings, which are hyperlinks.