As the "Triple Witching Day" approaches, the US stock market is on edge, with Nvidia plummeting 8% overnight and the Nasdaq stopping its seven-day streak of new highs. The "fear index" VIX soared.

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.

According to the options analysis platform SpotGamma, around $5.5 trillion worth of index, stock and ETF options will expire on Friday.According to analyst John Marshall of Goldman Sachs, the nominal value of expiring options will exceed $5.1 trillion, making it the largest in history.The notional value of expiring options will exceed $5.1 trillion, making it the largest one in history.

Triple Witching Day in the US stock market refers to the day when the contracts for index, stock, and ETF options expire on the same day. It occurs four times a year, typically on the third Friday of March, June, September, and December.

As investors and traders need to adjust their positions before these contracts expire, the market often experiences significant volatility and increased volume around Triple Witching Day.

The option expiration coincides with the index rebalancing of the S&P Dow Jones Industrial Average and subsequent ETF adjustments, adding to the market's already volatile state.

On Thursday, the US stock market had already reacted ahead of the expiry of Nvidia-related contracts, with Nvidia experiencing significant volatility during the day, rising 3.8% before plunging 4.5%, equivalent to an 8% dive from the peak, ultimately closing down 3.5% off the historical high.

In terms of large-cap stocks, the S&P 500 index fell for the second day in eight days and pulled back from its new high, while the Nasdaq and Nasdaq 100 fell away from their new highs. The "fear index" VIX rose over 6% and broke the 13 level.

Nvidia may be the first to bear the brunt.

The US stock market has been performing strongly lately, and the implied volatility of S&P 500 options remains near its pre-pandemic low at the time of this quarter's option expiry.

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.

According to Scott Rubner, managing director of Goldman Sachs' global markets division, the disappearance of approximately $5 billion in long gamma (the positive gain in strategy value when the underlying asset price fluctuates while holding an option position) may lead to a period of market turbulence.

Brent Kochuba, founder of SpotGamma, pointed out that the nominal value of call options is about 11 times that of put options, according to the estimates associated with call options. This is significantly different from last quarter, when the ratio was close to 5:1. The widening gap indicates an increasing demand for upside exposure and a shrinking demand for put options.

Kochuba said this could lead to slight declines in certain heavily traded stocks and indices on Friday and early next week.

Nvidia may be the first to bear the brunt. Since the end of 2022, Nvidia's stock price has skyrocketed by nearly 800%, making buying Nvidia call options an increasingly popular trade in the past year. According to SpotGamma data, with investors pouring into call bets on Nvidia at almost unprecedented rates, open call options for Nvidia now exceed those for popular ETFs tracking the S&P 500 and other large-cap indices, a situation considered to be "extremely rare," and about one-third of the open call options for Nvidia are expected to expire this Friday.

According to Bloomberg, the expiring value of Nvidia-related options is the second-largest among all underlying assets, second only to the S&P 500 and higher than related ETFs such as the SPDR S&P 500 ETF and Nasdaq 100.

Analysis suggests that the driving force behind Nvidia's rising stock price could weaken after the option expiry on Friday, and the "Gamma squeeze" phenomenon, which has been driving up the stock price, could slow down. The term "Gamma squeeze" refers to the benign cycle in which intensive purchases of call options force option market makers to buy more underlying stocks to hedge risks, thereby driving up the stock price.

Analysis suggests that the driving force behind the rise in Nvidia's stock price may weaken after the option expires on Friday, and the "gamma squeeze" phenomenon that has been pushing the stock price higher may slow down. "Gamma squeeze" refers to the intense buying of call options that forces market makers to buy more underlying stocks to hedge their risks, creating a virtuous cycle that pushes up stock prices.

Editor/Somer