This Friday is "Triple Witching Day," where the US stock market fluctuated wildly. US stock futures dropped, but the decline narrowed at the opening bell, after which there was a strong rebound, with the S&P 500 Index even turning positive by nearly 2%, bouncing back 150 points from the day's low, although the gains narrowed as the closing approached.

Analysis suggests that on Friday, the US stock market opened with a rebound because the US government shutdown crisis may actually help ease concerns over the Federal Reserve no longer cutting interest rates. Additionally, as short positions were excessively squeezed in the past few trading days, the market's reversal led to a furious short covering that accelerated the rebound. However, the expiration of a large number of Call Options, the approaching holiday, and the risk of a US government shutdown further increased market uncertainty, and fluctuations may continue into next week.

"Triple Witching Day" arrives, causing significant market fluctuations. Short covering prompts a rebound in US stocks.

According to statistics, on "Triple Witching Day," the total amount of options linked to stocks, Exchange-traded Funds (ETFs), and indexes set to expire exceeds $6 trillion. Data from Asym 500 shows a specific figure of $6.6 trillion, while some Institutions even estimate this nominal value to be higher, reaching $7.7 trillion. Coupled with the weight adjustment of the S&P 500 Index, this may trigger massive trading in a low market liquidity situation, resulting in volatility.

Moreover, the collapse of high-momentum assets like Bitcoin and fears that CTAs (Commodity Trading Advisors) may sell off billions of dollars in stocks are reasons for the overnight drop in US stock futures.

However, as the S&P 500 Index futures rebounded nearly 200 points from the intraday low, the reversal in market sentiment and direction caught traders by surprise.

Financial media ZeroHedge analyzes that the simplest and most likely explanation is that the US government shutdown itself might be Bearish, but in the context of the Fed's hawkish shift that led to a market plunge on Wednesday, the government shutdown has turned into a bullish factor: because a government shutdown typically brings deflationary pressure (at least in the short term), and any fears over the Fed not cutting rates anymore (or even raising rates) would quickly dissipate, as Fed Chairman Powell would be forced to rescue government departments again. Indeed, just hours away from the government's closure, the losses from Wednesday had almost been completely recovered.

Another reason for today's strong market rebound is the brutal squeeze on the latest round of short positions.

According to a report released by Goldman Sachs on Friday, hedge funds have net sold US stocks for four consecutive trading days, with the selling speed reaching the fastest pace in eight months. This trend is mainly driven by a large amount of short selling, with a small portion from long selling (at a ratio of 3.3:1).

According to the report from Goldman Sachs Analyst Vincent Lin, the cumulative nominal short selling of US stocks over the past four trading days has reached the largest scale since early January this year, ranking among the top in the past five years.

For example, macro products and individual stocks accounted for 77% and 23% of the total net selling respectively, with net selling mainly driven by long selling and short selling; short positions in ETFs (Exchange-Traded Funds) increased by +2.5% (a week-on-week increase of +8%), primarily driven by an increase in short positions in large-cap stock ETFs; of the 11 sectors, 7 experienced net selling, mainly in the industrial, information technology, medical care, and consumer goods sectors, all driven by short selling. The sectors with the highest net buying were real estate, materials, and consumer discretionary, all driven by long buying.

Moreover, the short selling over the past four days has already led to the largest net leverage decline this week since the pandemic.

In summary, due to the sudden increase in short positions this week, these investors originally expected the stock market's decline to accelerate during the "government shutdown weekend." However, the sudden market reversal means that the US stock market experienced a fierce large-scale short covering on Friday, with those short sellers who positioned incorrectly over the past four days, whether actively or forcibly (such as margin calls at 3 PM), scrambling to cover their positions.

Analysis: The US stock market is heading into a holiday and is expected to remain tumultuous next week.

According to SpotGamma's model analysis, this "Triple Witching Day" is also accompanied by a large number of expiring Call Options, which will significantly reduce the market's gamma values, leading to a few days of market vulnerability at the beginning of next week, and turbulence could continue. The rise in US stocks during Friday's closing gradually narrowed to around 1%.

In the Options market, a Negative Gamma state refers to the amplified sensitivity of the options positions in the market to changes in the price of the underlying asset. Specifically, Gamma is the sensitivity of the Delta of the options position to changes in the price of the underlying asset. A Negative Gamma state can have a significant impact on market liquidity and volatility, especially amplifying price fluctuations in the market.

Data shows that the current market is in a certain Negative Gamma state, with macro factors (such as fluctuations in bond market interest rates) becoming the main downside trigger. SpotGamma believes that positions in the options market further exacerbate the volatility in the stock market. For example, large technology stocks, the "seven sisters" of the USA stock market, generally exhibit a strong bullish tendency, indicating that traders are holding a large number of Call options, while market makers may hedge their risks by holding stocks. As the market declines, market makers may be forced to sell stocks, exacerbating market volatility.

At the same time, the approach of holidays and the risk of a government shutdown in the USA further increase market uncertainty. Next Tuesday will be half a trading day, and the Christmas and New Year's holidays will also weaken market momentum. Short-term Put option holders need the market to experience large fluctuations quickly, otherwise the value of the options may significantly diminish due to time decay. The risk of a potential government shutdown in the USA may become a catalyst that could have directional effects on the market.

Editor/lambor