Stocks are having a great day. High yield and oil are behaving, and we are entering a seasonally strong period of the year.
It may last, but it may not.
The problem is the unusual combination of an historic Fed meeting and the quadruple witching expiration, the quarterly expiration of stock and index options, and stock and index futures, which occurs on Friday.
Read MoreWitching Hour: CNBC Explains
December is traditionally the largest option expiration quarter, so the amount of money tied up is fairly large.
The concern is that the market drops a bit after the Fed hike, as it normally does, but because we are near expiration it goes through certain key levels around which option prices are based (known as “strike prices”) and it triggers further selling.
This could happen because put options held by investors would suddenly go “in the money.” This would trigger another wave of selling by the market makers who sold those puts, who would hedge by selling stock.
Why would this happen? The concern is that the Yellen adopts what traders perceive to be a “hawkish” tone, i.e. she implies that the Fed could raise frequently in 2016.
This may not be a big issue if the Fed hikes but then maintains a very dovish tone, i.e. implies that they will be VERY slow in raising rates next year. This is the consensus opinion of most traders, since the dollar is already strong, global growth is fairly anemic, inflation is below target, and traders do not believe the Fed wants to do anything that will excessively roil markets.
The risk is that Yellen comes off as hawkish in any way. Given how every comma, every nuance of her speech, is parsed, you can understand why some are a bit nervous.
[“source -cncb”]
