"Quad Witching Day" is here! $3.4 trillion options expiring, will US stocks plummet tonight?

Tonight

Goldman Sachs strategist said it could be a historic day for the US options market.

$3.4 trillion

According to John Marshall, head of derivatives research at Goldman Sachs, as stock options (especially "end-of-term options") continue to thrive, options contracts with a nominal value of $3.4 trillion for individual stocks, ETFs, and S&P 500 index futures will expire on Friday, as will monthly and quarterly options for September.

Goldman Sachs shows that nearly $2 trillion worth of S&P 500 index options will expire in the early trading session on Friday, while $555 billion worth of individual stock options will expire later in the day, along with many other contracts.

Marshall said that due to the fluctuation of the US stock market in the past few weeks, a large number of options expiring on Friday are very close to the price, which may further exacerbate market volatility. The expiration date of quarterly options often coincides with market volatility, which is considered traditional wisdom on Wall Street.

"Given that the US stock market has been fluctuating within a range in the past few weeks, a large portion of the outstanding contracts have strike prices close to the current spot level," he said.

The nominal value of options expiring on Friday will be the sixth largest on record and the largest in September.

Marshall said, given the relatively low stock market volatility, such a high number of outstanding contracts is surprising. He also pointed out that the trading volume of short-term options with less than 24 hours until expiration has increased, currently accounting for 49% of S&P 500 index options trading volume.

Marshall added that the growth of options trading linked to indexes and ETFs has contributed to the surge in outstanding contracts before September.

Intense stock market volatility ahead?

Charlie McElligott, another derivatives analyst at Nomura, warned clients to prepare for potential volatility.

Because in the past 11 years, on the expiration day of September options, the S&P 500 index has closed lower on 10 trading days, with an average return of -0.5%.

Historical data also shows that the week after the expiration of September options is usually a volatile week for the US stock market. On average, September is the worst-performing month for the S&P 500 index. McElligott also pointed out that a significant amount of risk exposure on options traders' books will evaporate on Friday, which could lead to increased volatility as traders establish new positions to replace expiring options.

Nomura Securities' analysis shows that large quarterly options expiration events often correspond to recent market weakness.