Benzinga's PreMarket Prep airs every morning from 8-9 a.m. ET. During that fast-paced, highly informative hour, traders and investors tune in to get the major news of the day, the catalysts behind those moves and the corresponding price action for the upcoming session.
On any given day, the show will cover at least 20 stocks determined by co-hosts Joel Elconin and Dennis Dick along with producer Spencer Israel.
What makes the PreMarket Prep show so different from other financial broadcasts is that one of our main goals is to educate our audience. On Friday’s show, a very important topic was discussed that may have helped investors navigate the often treacherous price action on one of the four quadruple witch expirations of the year that is occurring in Friday’s session.
Also, with Friday’s expiration slated to be the largest one on record in terms of stock value as a result of the options expiring — $3.4 trillion of equity options, with $720 billion of it being single equity options — it was a timely discussion as well.
What Is Quadruple Witch Expiration? Quadruple witching is a predetermined date when there is a simultaneous expiry of stock index futures, stock index options, stock options and single stock futures. Of the aforementioned contracts, single stock futures are the least followed and traded.
While stock options contracts and index options expire on the third Friday of every month, all four trading instruments expire simultaneously on the third Friday of March, June, September and December.
Reading The Tea Leaves: Each trading session at 8 a.m. EST, imbalances are published by the exchanges. The imbalances are determined by the orders entered above and below the previous day’s closing price.
In other words, if there is a preponderance of “buy” orders coming in above the previous day’s close, it will result in a “buy” imbalance being posted. Orders below the closing price do not figure into the equation.
On the flipside, if there is a preponderance of “sell” orders below the closing price, it will result in a "sell" imbalance being posted. Once again, orders above the closing price will not factor into the equation.
What Happened Friday: As detailed in the discussion below, what you originally see and what you get on the first look at imbalances can be very different, especially on days such as Friday, with its quadruple witch expiration.
The reason: a large imbalance to one side can actually “flip” to the other side. All it takes is one institution to decide to take the other side of the order to enter or exit a large position.
It should be noted the price action in the December S&P 500 futures can be an excellent indication for the imbalances.
On the chart below, notice how the index futures increase in price at 8 a.m. as aggressive traders anticipated issues in the index opening much higher based on the imbalance information.
Once the buy imbalances were offset, the predatory traders had to exit stocks and decide whether or not to flip to a short position.
Moving Forward: It can be profitable to attempt to front-run imbalances and “buy” or “sell” into the opening print. However, traders should be prepared for the imbalances to change, especially on days of option expirations and even more so on days of quadruple witch expiration.
The discussion on imbalances from Friday’s show can be found here:
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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