**Access to a full list of stocks with estimated impact is available at the end of this note**
The Event: Next Friday, on January 21st, deep in the money calls worth billions of dollars are set to expire. Deep in the money calls are unique, because they are valued as being essentially equivalent to shares of stock (referred to as a Delta 1 position). Most of these calls were purchased in 2021 and have participated in the massive stock rally over the last year (S&P500 +24% since 1/1/21).
The Participants: We think these calls are held by a wide variety of players, from large hedge funds all way to wealthy individuals. For example, its well known that Nancy Pelosi favors purchasing long-dated call options. By purchasing large, long-dated call positions, investors gain levered exposure to higher stock prices, while limiting downside risk. Meaning, they can pay a premium to buy more upside through long-dated calls then they can get by buying shares of a company’s stock using the same amount of investment capital.
The Potential Impact: Regardless of these investor’s individual strategies, at SpotGamma, our models indicate that the net options delta set to expire on Friday, January 21st is over $125 billion. Our base case is that the expiration of these deep in the money calls are a catalyst for volatility – that is expanded stock price movement higher or lower. The ability to assign a direction to this volatility is dependent on how one assumes these investors are positioned.
If the bulk of these call positions (which could vary on a ticker by ticker basis) are held long by investors, then our assumption is that there are options dealers who are short these calls. In turn the dealers likely hedge these short call positions through owning shares of the underlying stock, and/or offsetting long call options (aka long delta positions).
Conversely, if these investors are net short calls, then dealers would own long calls and may in turn short the underlying shares as a hedge.
While it is impossible to know the long/short position unequivocally, our belief is that the bulk of these calls are “long” and that dealers are in turn long shares of stock as a hedge. Therefore when these call positions are closed and/or expire, dealers will need to sell their long stock hedges.
Further it is true that dealers could have a portion of these delta hedges cover, should the calls be exercised in which case short shares would be delivered to offset long hedge positions.
Some of the Names in Play: Here is a short list of some of the top constituents in the S&P500, with the deltas expiring as a percent of ADV:
- AAPL 27%
- MSFT 11%
- AMZN 61%
- TSLA 107%
- FB 15%
- GOOGL 20%
Similarly, consider the ramifications for ETF’s like ARKK. This well known fund holds many stocks which are set to have very large call positions (large deltas) expiring, most notably in TSLA. Should these individual stocks generally come for sale, the expiration-linked hedging flows could worsen the ETF’s performance.
Previous Similar Instances: Comparatively, this January OPEX is of similar size to January 2021. We see the size of the respective January expirations as a function of strong stock performance, and the growth of options trading. However, while ‘22 and ‘21 hold >$100bn in call deltas, they are major outliers to previous years. For instance in January of ‘20 there was <$1bn in delta expiring.
Looking back at the performance of January of ’21, the S&P closed flat from January OPEX to February 1st, but had a large trading range of nearly 4%. The days after expiration led to the infamous period of peak “GME Mania” which brought margin calls to the likes of Melvin Capital, and capital calls to Robinhood. Its therefore very tough to isolate any option’s specific impact, but it’s certainly possible the large expiration added to the volatility.
The Full List of Names: SpotGamma has compiled an expiration spreadsheet, which shows the delta expiration as a function of average daily volume (ADV). Our thesis is that stocks with a higher percentage of ADV expiring may be more impacted by this event.
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