Thanks to some other commitments, today’s note will be a short one on a typically weighty pair of topics.
First, today is a monthly options expiration. With the advent of weekly and now daily expiries, monthly expirations have been downgraded from “double-witching” causes for concern to seemingly just another day. But that is an oversimplification. And today, thanks to the rebalancing of the NASDAQ 100 (NDX), we have the potential for some extra fireworks on the close.
The heavy weighting of mega-cap tech stocks in NDX (and thereby QQQ) has gotten so extreme that the index can no longer be considered well-diversified. That is causing Nasdaq to reduce the weights of Nvidia (NVDA), Microsoft (MSFT), Amazon (AMZN), Tesla (TSLA), Alphabet (GOOG/GOOGL), Meta Platforms (META) and Apple (AAPL) within the index. Since the index change is effective on Monday, funds that track the index need to adjust their positions as of today’s close.
In theory, we should expect to see relatively heavy selling in those names on the close and buying in the 92 other names that will be going up in weight. We also might expect to see some pressure on SPY today because those stocks are all heavily weighted in the S&P 500 as well. That said, on that basis, QQQ should underperform today. But nothing is a given here.
As a result, we see a preponderance put buying in QQQ and the affected stocks at this point. We also see some marginal net call buying in some of the smaller names in NDX. But with markets relatively unchanged at midday, it is hard to separate the causes.
Earlier today we saw some aggressive pre-market buying of ES futures. The aggressive run-up seemed to have the hallmarks of a 0DTE move. And it very well might have been that type of rally.
That is thanks to an overlooked feature of monthly expirations. On most days, we have but one set of 0DTE options, but on monthly expirations we have two. A key feature of monthly expirations is that we have index options that expire on the open. As with all options on expiration day, those become 0DTE. Remember, every option becomes 0DTE on expiration, thus every options class has 0DTE options on major expiration days.
Thus, we have the potential for a fascinating afternoon on what otherwise might have shaped up to be a sleepy mid-summer Friday.
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