Source: Zhitong Finance.
On Friday, the US stock market will welcome the "Triple Witching Day", when record-sized options will expire, possibly causing short-term market volatility.
According to the options platform SpotGamma's estimate, about $5.5 trillion of options will expire on this "Triple Witching Day." "Triple Witching Day" refers to the day when ETFs, stocks, and index options all expire. This situation occurs once a quarter, respectively in the third week of March, June, September, and December in each year, causing a surge in trading volume and sudden price fluctuations.
On this three witching day, $S&P 500 Index (.SPX.US)$The implied volatility of options is close to the pre-COVID-19 pandemic level, benefiting from the benchmark index and other AI-related stocks surging. The options are due to expire just as the index is rebalanced, at which time the S&P will adjust the component stock weights, and the ETFs tracking its index will also adjust their holdings.$NVIDIA (NVDA.US)$AI-related stocks and other options are skyrocketing. The expiration of options coincides with the index rebalancing, at which time the S&P index will be affected.$Dow Jones Industrial Average (.DJI.US)$Stocks related to AI, including ETFs that track the index, will adjust their hold positions as Standard & Poor's adjusts the component stock weights during the rebalance, which happens to coincide with the expiration of the options.
The US stock market may be volatile and uneasy.
Scott Rubner, Managing Director and Strategy Expert of Goldman Sachs Global Markets Division, said that after these positions are withdrawn, the market may experience some volatility, and these positions are expected to bring about $5 billion in so-called "long gamma."
Rubner said that a series of events on Friday, as well as the Russell Index adjustment next Friday, will lead to explosive trading periods, because we have seen traditional asset management companies more actively using excess trading volumes and strategic trading positions.
According to SpotGamma's founder Brent Kochuba, this time the nominal value of call options is about 11 times higher than the nominal value of put options. Last quarter, this ratio was close to 5:1. The widening gap indicates that the demand for the upside risk exposure continues to grow, while the demand for put options is shrinking. He also said that this may also lead to a slight decline in trading-active benchmark indices and stocks on Friday and early next week.
Kochuba said, "There are too many call options in the portfolio." "This situation will start to consolidate, and the market will become more turbulent."
Is the impact overplayed?
Although retail investors may hardly notice these events, traders will definitely pay attention to them. For them, a large number of option expirations mean difficult choices: rolling or offsetting positions or completely liquidating them. This may cause more volatility, especially in the last hour of trading, the so-called "witching hour."
The estimated size of expiring options varies depending on the analyst's calculation method. Goldman Sachs analyst John Marshall estimates that the scale of expiring options this Friday will be the largest in history, with a nominal value exceeding $5.1 trillion, surpassing the historical high of $4.9 trillion set in December last year. Citigroup expects a smaller scale, of $4.8 trillion.
Market participants warn that the impact of quarterly options expiration is often exaggerated. However, even a slight volatility in the stock market may be different from the recent extreme calm. Rocky Fishman, founder of the derivatives analysis company Asym 500, said that although the nominal value of options expiring may be increasing, the entire market is also growing.
Fishman said: "As the economy grows and the stock market value rises, all numbers will grow over time. However, measured as a percentage of the size of the stock market, I am sure that we are far behind December last year."
This quarter, except for a brief rebound in April, the volatility index of the Chicago Options Exchange (VIX) has remained near the lowest level since early 2020. Selling option ETFs is becoming more and more popular, and decreasing day-to-day fluctuations when the stock index goes up has made traders reluctant to buy products to prevent sell-offs. The S&P 500 index is expected to rise by about 4% in the second quarter, marking its third consecutive quarterly rise.
Kochuba said that this time Nvidia will also play a more important role. The value of the expiring Nvidia contract ranks second among all underlying assets, second only to the S&P 500 index. This subverts the previous pattern and illustrates that the chip manufacturer has great influence in a wider market.
Editor / jayden