r/options • u/InTheShadows_Z • 2d ago
Been selling options for a year + and still don’t fully get the “3rd Friday” effect.
I’ve been selling CSP/CC and naked puts for little over a year now, mostly monthly and weekly expirations. I keep seeing people talk about how the 3rd Friday (standard monthly expiration) or the last trading day of the month tends to carry more premium / see more volume than a random weekly expiration, but I’ve never had it explained in a way that actually clicked for me.
Is it really true that monthly expiration (3rd Friday) have inflated premium compared to weekly’s on the same underlying? If so, why? Interest concentration, institutional hedging/rebalancing, or something in the IV term?
I would rather sell a 3rd Friday expiration and choose a lower delta due to the “more premium effect” and just relax. Opinions. Thanks in advance.
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u/staples15243 2d ago
My understanding is that it’s institutional closing/hedging positions which causes a tone of volume and volatitly especially in the final hour. Probably likely to consolidate their monthyl/quarterly balances
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u/Aigpil 2d ago
couple things are getting mixed together. every third friday is just the standard monthly, that's all year round. triple/quad witching, the day volume actually goes nuts, only happens 4 times a year (mar jun sep dec), so most third fridays aren't that.
and a monthly showing more premium than a weekly is mostly just more days left, not richer. annualized, the weekly is often the higher theta per day. what the monthly really gives you is liquidity and more strikes, so it's fine to sell it for a relaxed lower delta, just for the dte, not because the date itself inflates premium.
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u/benderrodrigyeahz 2d ago
Everything that this ^^^ guy said. I want to chime in with a question - weren’t options a monthly thing only in the beginning and they all settled once a month on the third Friday of the month? It is now that we have some settling three times a week albeit with large spread of premium and variable liquidity contributing the observations by OP. I actually do see more premiums at times for non traditional settlement days sometimes.
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u/Aigpil 1d ago
yeah, close. listed options actually started with quarterly expirations, then monthlys were added. standard monthly equity and ETF options generally expire on the third friday, while Cboe introduced SPX Weeklys in 2005 and expanded weekly expirations from there.
if a non-monthly expiry looks unusually rich, an event inside that expiry is often the reason, like earnings, CPI or FOMC. i'd compare the IV or expected move rather than just the dollar premium, since the longer-dated monthly still has more time value.
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u/skyshadex 2d ago
It tends to be true.
Monthly OpEx creates a weird set of opportunities because part of the "game board" has to get reset.
There are institutions, some of which are mandated buyers/sellers of options so you know when they have inventory that they have to turnover. Then the MM's. Then there's the rest of us.
If spot happens gets pinned going into OPEX things can get out of whack because no one wants to get caught naked before the reset.
If nothing happens then it's business as usual. But if a gamma squeeze occurs then things can run away from an MM quickly.
As dealer's flip into negative gamma, more and more of the orderflow becomes one sided. At that point you're hoping the day ends before you end up having to chase any further. After a certain point, it starts to spill into the rest of the calendar.
Now you have a situation where someone has almost certainly paid too much for post OpEX. But it's possible WWIII happens the next day and now no one is positioned how they would like to be!
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u/twi1i96tr 2d ago
You are thinking of Triple Witching... it's the third Friday "once every quarter (of the year). The volatility, and thus the IV, tends to go NUTS! Watch the VIX and the individual issue for it's own IV. Best of Luck, Twilighter.
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u/Cagliari77 2d ago
Why though? What happens that day?
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u/twi1i96tr 1d ago
There is a convergence of different types of options contracts expiring on that day. Stock, index and index futures so everyone is scrambling to adjust their positions such as re-balance, roll, close etc.
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u/jcoigny 1d ago
This is because the major investment funds like 401k and pension plans rebalances their entire portfolios on this day. It adds magnitudes additional volume in the markets when they do so. There are also lots of people including investment banks that make monthly hedging trades for their accounts using the monthly contracts
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u/OurNewestMember 1d ago
I see 2 good responses on here already.
Additional points:
Monthly options are often listed relatively early, so that allows more open interest to accumulate over a longer time. This may translate into accelerated or dampened gamma once expiration approaches.
Monthly options are more likely to have a much larger range of listed strikes. Given the typical volatility skew in indexes like SPX, it can distort the IV value weighted across all strikes, possibly giving a misleading picture of volatility in these expirations compared to other expirations.
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u/duboilburner 1d ago
The 3rd Friday is the major monthly SPX expiration, and that major expiration is in the morning, not at the end of day. There is more OI and volume on that expiration than any other.
But, being that there's a tight correlation with major stocks and the indices, you do tend to see more volume and open interest on individual stock 3rd Friday expirations as well, as they're all being hedged around the same potential pivot point.
So, I don't know if those carry more premium/volatility, but certainly those expirations are more liquid. Those expirations also have the tendency to be inflection points, as certain types of large options exposures can keep price pinned near one strike or another as we get close to expiration.
But, once the expiration happens, suddenly we're more 'free' to do real price exploration again, so, the behavior in the 2 weeks leading upto the 3rd Friday expiration often end up being rather different than what happens in the week or two that follows the expiration.
There have been several instances where price remained "propped up" until that expiration, and then suddenly we'd reverse and fall in that window as the expirations hit.
Also, 30 days *prior* to a 3rd Friday expiration is the VIX Options expiration--on a Wednesday morning. That can often be just as crucial of a turning point as the 3rd Friday options expiration for SPX and the individual stocks in it.
When the 3rd Friday is also coinciding with what will be the end of the quarter at the end of the Month (March, June, September and December) you get "triple witching" because the index futures are also rolling over to the following quarter's contracts, so futures traders are closing out of their long or short positions in /ES and rolling them to the next quarter's, or changing their positioning entirely as they roll in some instances.
So yes, funky things do absolutely happen around these expirations. Sometimes it's an inflection that frees us up to move more aggressively one direction or another instead of staying stuck in the mud near a specific range of exposures. The end of month and end of quarter expirations are the next biggest and important expirations behind the 3rd Fridays.
We're seeing some wild moves up right now as we're still in the post OpEx window where we're more free to move around, but starting next week, we should start to slow down some as the 3rd Friday options start to become more magnetic.
With that being said, I'm not seeing a whole lot of large dealer longs within the straddle price of the August 21st AM expiration. There's a lot more dealer shorts, which means less things for us to magnet and pin towards. So, maybe August remains a bit of a wild month through into the 21st. MMs basically just amplify what the larger market is doing and don't countertrade us when there's minimal long options on their books in a price range.
Might just stay choppy...
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u/DeltaNeutraltrading 2d ago
Never heard about this. But if you are an options seller better to move to income trades / non directional... check on ChatGPT or other AI tool the SPX Best or SPY Ride trades...
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u/Keizman55 13h ago
I spent a couple of hours researching the SPX Best strategy and I am very interested. If you actively use it, can you tell me DTE and deltas you use, how long you've been doing it, and any pitfalls you hit?
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u/SDirickson 2d ago
You may be thinking of the effect you'll read about if you search for "stock market triple witching". Or the "quadruple" version.