Involving $5 trillion! The Triple Witching Day is coming, with the scale of expiring US stock options potentially being the largest in history
Some analysis points out that although the concentration of stock options expiring in the US stock market has been boosting the market, there may be an opening for a "soft window" at the beginning of next week, with SPX expected to test 5400 points. As stock options expire on Friday, NVIDIA is expected to lose about half of its gamma, which may dampen its momentum. The scenario of "stock price decline, while volatility remains high" is possible
According to Goldman Sachs analyst John Marshall's estimate, this Friday's triple witching day in the U.S. stock market will be the largest ever, with the nominal value of expiring options exceeding $51 trillion, surpassing the record set in December last year when it was $49 trillion.
The possible record-breaking scale mentioned above is driven by single stock options. Goldman Sachs estimates that the nominal value of single stock options in this round is expected to reach a record-breaking $870 billion.
Triple witching day refers to the simultaneous expiration of index futures, index options, and single stock options. This scenario occurs once every quarter and often significantly increases the volatility of the U.S. stock market.
The nominal value represented by the expiring options on Friday is equivalent to 9.3% of the market value of the Russell 3000 Index. This ratio is higher than most months, second only to December 2023.
Nearly half of the S&P 500 options are still end-of-day options. Retail trading remains very active, with the proportion of 1 lot of SPX options and end-of-day 1 lot options trading still high in total trading volume.
The trading volume of call options for index options and single stock options has increased, while the trading volume of put options for single stock options has decreased.
Although much of the increase in options activity is due to retail participation in the frenzy of large-cap tech stocks and hedge funds chasing returns, it is worth noting that the second quarter earnings season this year was unusual, with stocks experiencing larger price swings on earnings days than in the past eight quarters, with an average swing of ±4.6% on earnings days.
The volatility ratio between earnings days and non-earnings days is 4.2, reaching the highest level since the third quarter of 2018. This is the actual volatility situation, while the options market overestimated the volatility on earnings days, pricing in a ±5.8% swing, higher than the long-term average of ±5.1%.
Although options concentrated expiration (OPEX) has always supported the U.S. stock market, SpotGamma's analysis points out that a "soft window" will open early next week. It is expected that after options expiration, the positive gamma of the S&P 500 Index will decrease by about one-third, and starting from next Monday, the market will fluctuate more freely.
It should be noted that positive gamma positions can help stabilize the market, as these positions will force holders to buy low and sell high during price fluctuations, thereby reducing market volatility. When the underlying asset price rises, positive gamma will increase delta, thereby increasing the option value; when the underlying asset price falls, positive gamma will decrease delta, thereby slowing down the decline in option value.
SpotGamma has noticed a significant accumulation of positions at 5550 points in the S&P 500 Index, indicating that the bullish wall of SPX may rise, which will raise the upper limit of the trading range (currently at 5500 points). This growth is due to SPX steadily rising every day; new positions being added at higher levels; and the significant volatility of major individual stocks also pushing up the index. However, after options expiration, a soft period is expected, testing 5400 points. **
SpotGamma also pointed out that with the expiration of options on Friday, NVIDIA will lose about half of its gamma, which may dampen its momentum. In addition, it is rare to see open interest >140. The volatility of a single stock will breed instability. It is less likely to transition from the extreme scenario of "stock price rising, volatility rising" to the situation of "stock price stable, volatility decreasing," and the more likely scenario is "stock price falling, volatility remaining high."