According to analysis, although the concentration of US stock options expiring has been boosting the stock market, there may be a "soft window" opening early next week, with the SPX expected to test 5400 points. As Friday's options expire, Nvidia may lose about half of its gamma, which could suppress its momentum. It is possible for stock prices to fall and volatility to remain high.
According to Goldman Sachs analyst John Marshall, this Friday's triple-witching day in the US stock market will be the largest expiration of options in history, with a nominal value of over $5.1 trillion in expiring options, surpassing last December's record high of $4.9 trillion.
The possible record-breaking scale mentioned above is driven by single-stock options, and according to Goldman Sachs' estimates, the nominal value of single-stock options is expected to reach a record-breaking $870 billion this time.
Triple witching days refer to the simultaneous expiration of index futures, index options, and single stock options. This occurs once a quarter and often leads to a significant increase in volatility in the US stock market.
Reminder: Triple witching day is what investors commonly refer to as quadruple witching day, but since the suspension of single stock futures trading in the USA in 2020, the term quadruple witching day has been replaced with triple witching day.
The nominal value of the options expiring this Friday represents 9.3% of the Russell 3000 index market cap. This proportion is higher than most months, second only to December 2023.
Nearly half of the S&P 500 options are still end-of-life options. Currently, retail trading is still very active, and the ratio of trading for 1 hand of S&P 500 index and end-of-life 1 hand options is still high.
The trading volume of call options for both index and single stock options has increased, while the trading volume of put options for single stock options has decreased.
Although most of the increase in option activities is due to individual investors participating in the carnival of large technology stocks and hedge funds chasing returns, it is worth noting that this year's Q2 earnings season is exceptional, and the fluctuation range of stocks on earnings days is larger than that of the previous eight quarters, with an average fluctuation range of ±4.6% on earnings days.
The ratio of volatility on earnings days to non-earnings days is 4.2, which has reached the highest level since the third quarter of 2018. This is the actual situation of volatility, while the options market overestimates the volatility on earnings days and prices it at ±5.8%, higher than the long-term average of ±5.1%.
Although concentrated option expiration (OPEX) has always supported the US stock market, SpotGamma's analysis points out that a "soft window" will open early next week. It is expected that the positive gamma of the S&P 500 index will decrease by about one-third after the option expiration, and the market will be more free to fluctuate from next Monday.
It should be noted that positive gamma positions can stabilize the market, because during price fluctuations, these positions will force holders to buy low and sell high, thereby reducing market volatility. When the underlying asset price rises, positive gamma will increase delta, thus increasing the value of the option; when the underlying asset price falls, positive gamma will decrease delta, thus slowing down the decline in the value of the option.
SpotGamma noticed that there is a large accumulation of positions at 5550 points in the S&P 500 index, indicating that the call wall of SPX may rise, which will increase the upper limit of the trading range (currently 5500 points). This growth is due to a steady rise in SPX every day; new positions are added at higher levels; and the huge fluctuations of major single stocks also pull up the index. However, after option expiration, it is expected to be weak and test 5400 points.
SpotGamma also pointed out that with the expiration of options on Friday, Nvidia will lose about half of its gamma, which may suppress its momentum. In addition, it is rare to see open interest>140 for a single stock, which may breed instability. It is unlikely to change from the extreme situation of "stock price rise, volatility rise" to the situation of "stock price stabilization, volatility decline". The more likely situation is "stock price decline, volatility remains high".
Editor/Somer