The US stock market will usher in the 'Triple Witching Day' on Friday, when a record amount of options will expire, which may bring short-term volatility to the market.
According to the Finance and Economic News app, the US stock market will usher in the 'Triple Witching Day' on Friday, when a record amount of options will expire, which may bring short-term volatility to the market.
According to the options platform SpotGamma's estimate, this 'Triple Witching Day' will have about 5.5 trillion US dollars of options expiring. 'Triple Witching Day' refers to the day when ETF, stocks, and index options all expire at the same time. This situation occurs once every quarter, and happens in the third Friday of March, June, September, and December each year, leading to a surge in trading volume and sudden price fluctuations.
At the arrival of this Triple Witching Day, the implied volatility of S&P 500 index options is close to the lowest level before the COVID-19 pandemic, and the benchmark index benefits from the surge of Nvidia (NVDA.US) and other AI-related stocks. Options expiration also coincides with index rebalancing, and S&P Dow Jones indices will adjust component stock weights, while ETFs tracking their indices will also adjust their positions.
The options expiring on Friday may push up the VIX index.
US stocks are feared to be destabilized.
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Managing Director and Strategy Expert of Goldman Sachs Global Markets Division, said that after these positions are withdrawn, the market may experience some volatility, and it is expected that these positions will bring about $5 billion of so-called 'long gamma.'
Rubner said that Friday's series of events, as well as the Russell Index adjustment next Friday, 'will lead to explosive trading periods, as we have seen traditional asset management companies become more aggressive in using excess trading volume and strategic trading positions.'
Brent Kochuba, the founder of SpotGamma, said that this time, the expiration 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 upward risk exposure is constantly increasing, 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 begin to consolidate, and the market will become more volatile.'
Is the impact exaggerated?
Although retail investors may hardly notice these events, traders will certainly do. For them, a large number of options expiring means difficult choices: rolling or offsetting positions, or liquidating completely. This turmoil may stimulate more fluctuations, especially in the last hour of trading, the so-called 'witching hour.'
The estimated size of the expiring options varies depending on the analyst's calculation method. Goldman Sachs analyst John Marshall estimated that the scale of expiring options this Friday will be the largest ever, with a nominal value of over $5.1 trillion, surpassing the historical record of $4.9 trillion set in December last year. Citigroup's estimated size is smaller, at $4.8 trillion.
Market participants warn that the impact of quarterly option expiration is often exaggerated. However, even a slight fluctuation in the stock market may be different from the recent extreme calm. Rocky Fishman, founder of derivatives analysis company Asym 500, said that although the nominal value of expiring options may increase, the entire market is also growing.
Fishman said, 'As the economy expands and the stock market value rises, all numbers will increase over time. But measured as a percentage of the stock market size, I am sure we are far behind last December.'
In this quarter, except for a brief rebound in April, the volatility index of the Chicago Options Exchange (VIX) has been kept near the lowest level since early 2020. Selling options ETFs are becoming more and more popular, and the daily volatility of stock indexes is decreasing when they rise, causing traders to be unwilling to buy products to prevent selling. The S&P 500 index is expected to rise by about 4% in the second quarter, marking the third consecutive quarter of growth for the index.
Kochuba said that Nvidia will also play a more important role this time. The expiring Nvidia contract value ranks second among all underlying assets, second only to the S&P 500 index. This overturns the previous pattern and shows that the chip manufacturer has a huge influence in the broader market.
