Do Monthly Options Expirations Still Matter?

Tomorrow is a monthly options expiration in North America. These have historically been a big deal. Before the advent of weekly and daily expiring options, all options were bound to a monthly cycle. The overall open interest was much lower, but it was concentrated around options that expired on the third Friday of each month. However, even as traders gravitate increasingly toward ever-shorter expiries, there are still plenty of reasons why the classic monthly – and quarterly – expirations remain more noteworthy for options traders.

One reason of course is the options on most equities still trade on a monthly cycle. The most active options classes have moved to weekly cycles (with SPX and NDX soon to be joined by SPY and QQQ with daily expiries), but that leaves many more options that have not. Anyone who has a position in one of those stocks’ options needs to be concerned about rolling or hedging their expiring positions in the days leading up to that third Friday. If one has a broad-based options portfolio, there is still more work to be done in the days leading up to expiration than in other weeks.  

Another reason is that monthly options exist for longer periods of time than weeklies.  For example, Apple (AAPL) has options that expire each week from this Friday through December 30^th.  Two of those expirations are monthlies – tomorrow and December 16^th. But there are monthly options listed throughout 2023. Those options will be accumulating volume and open interest before the sequential weekly options become available. Although individual weeks can catch up, there is typically some sticky open interest that favors the monthly expirations. 

Finally, and perhaps most importantly, there is the unique feature of AM expirations in key index options. As we noted, there are now daily expirations in S&P 500 Index (SPX) index options, but those expire at the close of trading, just like equities. The monthly expiring options in SPX expire on the open, however. These can have an outsize effect on market movements on an expiration Friday morning. The unique combination of cash settlement and settling on the open makes them difficult to hedge. If, for example, hedgers are short calls and an economic report causes futures to rise, those hedgers might find themselves chasing the futures higher as they cross through expiring strikes.  Much depends on the type of pre-open move and who exactly is long or short the relevant options, but I hope that demonstrates how moves can become exaggerated.

These options are very popular with institutional traders, so their influence can be dramatic. As I look now at the SPX options that expire tomorrow, I see over 100,000 open interest in the 4,000 line, over 40,000 on the 3,900 line and over 25,000 on the 3,950 line. Think about how the market struggled with surpassing the 4,000 level earlier this week and how it bounced neatly off the 3,900 level this morning. That is unlikely to be pure coincidence. 

So yes, even though many of us find ourselves focusing on highly active short-term equity and ETF options, there is still plenty of justification for paying close attention to monthly expirations. And of course, quarterly expirations, but that’s a topic for another time.