"Three Witches Day" causes huge fluctuations in the US stock market! Short covering drives a sharp rally during the session, but market volatility may continue next week

This Friday marks "Triple Witching Day," with the U.S. stock market experiencing significant volatility. U.S. stock futures declined, but the drop narrowed at the opening, followed by a strong rebound, with the S&P 500 index briefly turning positive by nearly 2%, rebounding 150 points from the day's low, although the gains narrowed as the market approached closing.

Analysts believe that the rebound at the opening of the U.S. stock market on Friday was due to the potential government shutdown crisis possibly alleviating concerns about the Federal Reserve no longer cutting interest rates. Additionally, after excessive short squeezes in the past few trading days, the reversal in market trends led to aggressive short covering, accelerating the rebound. However, the expiration of a large number of call options, the approaching holiday, and the increased risk of a U.S. government shutdown further added to market uncertainty, which may continue to result in volatility next week.

"Triple Witching Day" Arrives, Market Vibrates Intensely, Short Covering Promotes U.S. Stock Rebound

According to statistics, on "Triple Witching Day," the total amount of options linked to stocks, exchange-traded funds (ETFs), and indices exceeding $6 trillion is set to expire. According to data provided by Asym 500, the specific figure is $6.6 trillion, while some institutions even estimate the nominal value to be higher, reaching $7.7 trillion. Coupled with the weight adjustments of the S&P 500 index, this could trigger massive trading in a low liquidity market, causing volatility.

Additionally, the collapse of high-momentum assets like Bitcoin and fears that CTAs (Commodity Trading Advisors) may sell off billions of dollars in stocks contributed to the overnight decline in U.S. stock futures.

However, as S&P 500 futures rebounded nearly 200 points from their intraday lows, the reversal in market sentiment and direction surprised traders.

Financial media ZeroHedge analyzed that the simplest and most likely explanation is that the government shutdown itself may be bearish, but against the backdrop of the Federal Reserve's hawkish turn that prompted Wednesday's market crash, the government shutdown became bullish: because government shutdowns typically bring deflationary pressures (at least in the short term), and any concerns about the Federal Reserve no longer cutting rates (or even raising them) would quickly dissipate, as Fed Chairman Powell would be forced to rescue government departments again. Indeed, just hours before the U.S. government shutdown, Wednesday's losses were almost completely recovered.

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

According to a report released by Goldman Sachs on Friday, entering Friday, hedge funds had net sold U.S. stocks for the fourth consecutive trading day, and the selling speed was the fastest in eight months This trend is mainly driven by a large amount of short selling, with a small portion being long selling (ratio of 3.3:1).

According to a report by Goldman Sachs analyst Vincent Lin, the cumulative nominal short selling of U.S. stocks over the past four trading days is the largest since early January this year, ranking among the top in the past five years of data review.

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 and short selling; ETF (Exchange-Traded Fund) short positions increased by +2.5% (week-on-week +8%), primarily driven by increases in large-cap ETF short positions; among the 11 sectors, 7 experienced net selling, mainly in the industrial, information technology, healthcare, and consumer goods sectors, all driven by short selling. The sectors with the highest net buying were real estate, materials, and discretionary consumer goods, all driven by long buying.

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

In summary, due to the sudden surge in short positions this week, these investors originally expected the stock market's decline to accelerate further during the "government shutdown weekend." However, the market's sudden reversal means that Friday's U.S. stock market experienced a fierce large-scale short covering, with those who were on the wrong side over the past four days, whether voluntarily or forced (such as margin calls at 3 PM), scrambling to close their positions.

Analysis: U.S. Stocks Enter Holiday, Expected to Continue Volatility Next Week

According to SpotGamma's model analysis, this "Triple Witching Day" is also accompanied by a large number of call options expiring, which will significantly reduce the market's gamma value, leading to a few days of market weakness at the beginning of next week, and volatility may persist. The gains in the U.S. stock market narrowed to around 1% by the end of Friday's trading session.

In the options market, a negative gamma state refers to the amplified sensitivity of option positions to changes in the underlying asset's price. Specifically, gamma is the sensitivity of an option position's delta to changes in the underlying asset's price. A negative gamma state can significantly impact 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 downward trigger. SpotGamma believes that the positions in the options market have further exacerbated the volatility of the stock market. For example, the "Seven Sisters" of large technology stocks generally show a high bullish tendency, indicating that traders hold a large number of call options, while market makers may hedge risks by holding stocks. As the market declines, market makers may be forced to sell stocks, exacerbating market volatility.

At the same time, the approaching holidays and the risk of a U.S. government shutdown further increase market uncertainty. Next Tuesday will be a half-day trading session, and the Christmas and New Year holidays will also weaken market momentum. Holders of short-term put options need the market to experience significant volatility quickly; otherwise, the value of the options may shrink significantly due to time decay. The risk of a potential U.S. government shutdown could serve as a catalyst, potentially having a directional impact on the market.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk