The much hyped “triple witching” came and went last week, and the dire predictions of a stock market pullback seemed to fizzle — but many economists and portfolio managers are eyeing a change imminent on the horizon.
To the uninitiated, triple witching refers to the expiration of stock options, stock index futures and stock index options happening all in one day. This happens periodically, but this past week it sparked doom and gloom predictions as much as $5 trillion in options were expiring and seemingly set to trigger a stock market slide in that final hour of trading.
Triple witching has had less of an effect on the overall market recently now than it did prior to the introduction of Zero Days to Expiration Options (0DTE) almost two decades ago, according to Phil Pecsok, founder of Los Angeles area hedge fund firm Anacapa Advisors.
The world’s largest futures and options exchange, the Chicago Board Options Exchange, produces its own volatility index dubbed the VIX, which has continued a downward march throughout 2024 — indicating little reason for traders to panic. Indeed, shorting has been a losing game even as the price of hedging has dipped.
“Vol[atility] really has been on the lower side and I think at some point, when the market turns lower, and it always does, the VIX will rise and vol will increase,” added Pecsok. “I do not expect vol to stay this low until the end of the year.”
Anacapa Advisors stays nimble and relies on short-term options trading and not leverage to outperform, Pecsok told Alternatives Watch, earlier this year. His firm launched its first fund in 2018 and went into growth mode last year, hiring Sam Rosenberg, who had previously held sales roles at Natixis and Societe Generale.
Tipping point?
“Vol [volatility] is low right now, so hedges are less expensive and aren’t a bad way to protect portfolios from drops,” said Pecsok. “Right now we are at a high level in the markets and vol is cheap, both are good reasons to add protection. That protection probably won’t pay off until the charts break, but it’s always cheaper to protect before a technical chart break rather than after.”
Numerous hedge fund managers have been expecting a market pull back despite new record highs of the S&P 500 and tech-driven Nasdaq. Much of it boils down to the so-called “Magnificent Seven.” These stocks — Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG and GOOGL); Amazon (AMSZ), NVIDIA (NVDA), Tesla (TSLA) and Meta (META) — have been the key drivers of market returns and have found fans even in among hedge funds.
According to a recent Bank of America survey, 69% of hedge fund managers said the tech-heavy group is the most crowded long trade right now.
Pecsok doesn’t see this trade lasting forever or the rise of market valuations being limitless. These stocks certainly can reverse and head lower, but right now they are the biggest and strongest leaders, he added.
“If the market breaks technical support and there is a stamped out the door, then maybe the VIX will start to rise — it will rise,” he said. “Usually, it takes something serious to get Vol to increase dramatically, some large concern (banking crisis etc.) and a growing fear that a crisis will spread — such as large defaults on commercial office space.”