Another "Triple Witching Day" for US stocks! The market faces a $51 trillion test

According to the financial news app Zhitong Finance, as Wall Street traders begin to respond to the Fed's rate cut, Friday's "Triple Witching Day" may further stir the market. Derivatives analysis company Asym 500 estimates that around $5.1 trillion of index, stock, and ETF options will expire on Friday.

"Triple Witching Day" refers to the day when contracts for index, stock, and ETF options expire on the same day, four times a year, usually the third Friday of March, June, September, and December. As investors and traders need to adjust their positions before these contracts expire, the market tends to experience significant volatility and increased trading volume around "Triple Witching Day".

This "Triple Witching Day" comes at a crucial moment for market positioning. The Fed announced a 50 basis point rate cut on Wednesday, the first rate cut in over four years, exceeding the 25 basis points that most economists had expected. Meanwhile, the S&P 500 index is less than 1% away from its historical high, and the CBOE Volatility Index (VIX), which measures expected volatility in the S&P 500 index, remains higher than the levels before the market crash at the end of July and early August, indicating that investors are still somewhat cautious.

Matt Thompson, Co-Portfolio Manager at Little Harbor Advisors, said, "Triple Witching Day may inject more volatility into the market, we just don't know in which direction." "Regardless of the market's view on the Fed rate cut, the large number of options expiring on Friday will exacerbate this view."

The expiration of these options coincides with the rebalancing of benchmark indices including the S&P 500 index, indicating that a group of investors will actively trade around these positions, with daily trading volume often reaching its highest level of the year. Before the market opens next Monday, Dell Technologies (DELL.US), Erie Insurance (ERIE.US), and Palantir (PLTR.US) will replace Etsy (ETSY.US), Bio-Rad Laboratories (BIO.US), and American Airlines (AAL.US) in the S&P 500 index.

Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence, stated that most of the open interest contracts for put and call options are concentrated around the 5500 level of the S&P 500 index. In recent weeks, the index has largely remained within a range of 200 points from that level, leading to market speculation that the narrow trading range is a result of options activity, making the index a battleground between investors and market makers.

Seasonal factors are also worth noting. The week following the September "Triple Witching Day" typically sees a significant decline in the stock market. According to Stock TraderAccording to Almanac data, since 1990, the S&P 500 index has averaged a 1.1% decline in the week following the "Triple Witching Day" in September. During this period, there have only been four exceptions in 1998, 2001, 2010, and 2016, where the S&P 500 index rose in all four instances.

Brent Kochuba, the founder of the options platform SpotGamma, stated that the ratio of call options to put options is 4 to 1, which helped the stock market record its best five-day performance of the year last week. He mentioned that considering the higher number of call options on Nvidia (NVDA.US) compared to other companies in the market, this should act as a "catalyst for further market gains." He added, "The recent market rebound has reduced a significant amount of short positions, easing the downside hedging pressure from the FOMC meeting and VIX expiration. The reduction in hedging pressure brings more possibilities for potential volatility in the coming week."

This is why traders closely monitor the other side of options trading, the Wall Street dealers who buy and sell stocks to maintain a neutral position in the market. Brent Kochuba noted that if the S&P 500 index falls below 5600 points, these dealers will "short," meaning they will have to start selling stocks below that level to maintain neutrality.

Currently, with a large number of options set to expire, the key question is whether investors will rebuild protective put options against economic growth concerns or chase this month's market rebound by buying call contracts as the S&P 500 index hovers near record highs. Matt Thompson stated, "If the Fed's rate cut is too small or too late, investors may buy protective put options. If dealers are forced to hedge, this could drag the market lower." "However, if the rate cut plan is well received by the market, it will support the stock market."