Today is a monthly options expiration. We’ve discussed at length how the advent of weekly and daily expirations has reduced, but not eliminated the importance of monthly expirations, there is a unique feature about January’s monthly expiration. This is the day when a large number of LEAPS, some of which have been around since 2020, finally go off the board.
In and of itself, this is not a huge deal. It has high significance for those who concern themselves with clearing and the throughput of data, it should be taken relatively in stride by customers who trade options. Here’s why.
Over time, some of those options have migrated to become deep in-the-money or out-of-the-money. Much of that delta has been hedged for quite some time. Many deep calls on dividend-paying stocks have been exercised, and because interest rates rose during the past couple of years, so have many deep puts. As time elapsed, the remaining near-the-money LEAPS simply became indistinguishable from normal options that expire today.
Yet there is still a significant number of existing strikes and open interest that will disappear after today. I took a glance at Tesla (TSLA), which is perhaps the most extreme example of a stock whose huge trading range over recent years has led to an inordinate number of strikes. The expiring strikes on this $208 stock range from $1.67 to $825. While the vast majority of deep in-the-money puts have been exercised, the expiring open interest comprises a wide range of calls (over 1,100 on the $1.67 strike to over 125K on the $825 line) and out-of-the-money puts (almost 35K on the $1.67 line alone). In total, we will be shedding over 225 strikes and just under 3 million contracts on just the expiring TSLA contracts alone.
As a result, those who track open interest should see a significant drop on Monday. And if you’re heavily concerned with data latency, that might improve slightly, though it should be imperceptible to most users.
In the meantime, we see key indices trading at or near record highs. The NASDAQ 100 (NDX) closed at one yesterday, and as I write this the S&P 500 (SPX) is trading at levels that would also set a new record. Considering our recent tendency to see late-day rallies, especially on Fridays, when weekly options also become 0DTE, it would not be a huge surprise to see an assault on those records. Never mind that as I write this, declining stocks are outpacing advancers. It matters more that the correct stocks are advancing.
Disclosure: Interactive Brokers
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Disclosure: Options Trading
Options involve risk and are not suitable for all investors. Multiple leg strategies, including spreads, will incur multiple commission charges. For more information read the “Characteristics and Risks of Standardized Options” also known as the options disclosure document (ODD) or visit ibkr.com/occ
