The heavyweight "Triple Witching Day" in the US stock market is here! A record-breaking $5 trillion options are about to make a decision.

Zhitong App has learned that some market analysts believe that if options traders in the market choose to balance gamma before the expiration of S&P 500 index-related derivative options, it may significantly suppress the volatility of the US stock market. When these traders balance their options or futures positions, their buying and selling behavior may restrict market volatility. It is understood that this latest "expiration wave of options" is likely to be the largest expiration of derivatives linked to the S&P 500 index in terms of data records.

According to statistics from Asym500 MRA, a derivative strategy and execution company under Macro Risk Advisors, approximately $5 trillion worth of options related to US stocks will expire this Friday, with 80% concentrated in various contracts directly linked to the S&P 500 index. This will set a record for the largest expiration of contracts in at least 20 years.

It is worth noting that before this massive $5 trillion options expiration, CPI and PPI data, as well as retail sales data known as "terrifying data," will be released, and the latest interest rate decisions from the Federal Reserve and other central banks will also be announced before the expiration of the options.

Therefore, in the eyes of some analysts, all of these heavyweight economic data, as well as the latest interest rate decisions announced by the Federal Reserve, the European Central Bank, and the Bank of England, as well as forward-looking speeches by central bank governors, may increasingly clarify the direction of choices before the $5 trillion options expiration on Friday. At that time, their choices will determine whether the trend of US stocks in at least the end of the year is downward, upward, or sideways.

"The Triple Witching Day" is about to strike, which may determine the trend of US stocks at least until the end of the year.

This heavyweight event known as the "OpEx (Options Expiration) frenzy" forces Wall Street traders to either continue to hold existing positions or start building new ones. Therefore, the options expiration frenzy may determine the major trend of US stocks at least until the end of the year. In addition, this event happens to coincide with the quarterly expiration of index futures and the rebalancing period of benchmark indices, including the S&P 500 index. This process is known for its ominous "Triple Witching Day" (simultaneous expiration of stock index futures contracts, index options, and individual stock options), which leads to a surge in trading volume and sudden price fluctuations.

"Triple Witching Day" occurs on the third Friday of March, June, September, and December. The trading volume on these days tends to soar, and usually reaches its peak in the last hour of trading, as traders may make significant adjustments to their portfolios. In addition to the previous expiration of single stock futures, this process used to be called "Quadruple Witching Day," but the term has become outdated since the trading of single stock futures in the United States was discontinued in 2020.

Although such heavyweight events often exacerbate market volatility, some analysts believe that this round of options expiration wave may be different. The cautious behavior of some market participants before the expiration seems to have been suppressing the sharp fluctuations in the benchmark index of the US stock market, the S&P 500 index, in a narrow range over the past few weeks.The S&P 500 index has risen more than 20% this year, undoubtedly entering a "technical bull market" territory, with a significant rebound of nearly 13% from its October low.

However, the recent market trend has eased. The benchmark stock index has not seen a daily gain or loss of more than 1% for 19 consecutive trading days, the longest period since early August. At the same time, the Chicago Board Options Exchange Volatility Index (VIX), also known as the "fear index," has dropped to 12.07, close to its lowest level in four years, suggesting that there is little volatility in the US stock market in the near term.

In addition to downward and upward trends, there is a third possibility: low volatility sideways movement.

Therefore, besides the downward and upward trends, at least until the end of this year, there is a third possibility for the US stock market: sideways movement. Another example of the low volatility in the US stock market is the "10-day realized volatility" of the S&P 500 index, which measures the fluctuation range of the index over the past 10 trading days. After hitting a low of 4.5% at the end of November, the indicator is currently at 6.8%. In comparison, during the US regional bank crisis in March this year, this ratio reached as high as 22.5%.

As an intermediary between buyers and sellers of derivative products in the stock market, the position of options market makers has always been a factor in controlling stock market volatility.

According to statistics from the Options Clearing Corporation (OCC), options trading volume is expected to set an annual record this year, with an estimated average daily trading volume of about 44 million contracts. According to an analysis by Nomura, exchange-traded funds (ETFs) options, which generate income through selling options, have doubled in popularity by 2023 and currently control a trading volume of about $60 billion.

The strong options trading activity of these ETFs has led options market makers to hold a large number of options contracts at least until the last trading day of this year.

In market terms, options market makers often belong to the net gamma camp and often need to go against the trend to achieve a balanced net gamma. In other words, they must continue to sell stock index futures when the stock market rises and continue to buy stock index futures when the market sells off in order to maintain a neutral overall position.Gamma is an important parameter in the options pricing market. It measures the sensitivity of the option's delta (the sensitivity of the option price to changes in the underlying asset price) to changes in the underlying asset price. When market makers hold a net gamma position, they need to continuously adjust their related investments (such as stock index futures and stock index options) to maintain overall portfolio market neutrality. Therefore, when the stock market rises, their delta values become more bullish (because the value of the call options they hold increases), so they need to sell corresponding stock index futures to reduce their bullish exposure and maintain market neutrality. Conversely, when the market falls, they need to buy stock index futures to offset the increasing bearish delta.

Market analysts believe that due to a large number of stock index futures contracts and stock-related options nearing expiration, this buying and selling has created a chain reaction, keeping the stock market in a narrower trading range.

Nomura Securities strategist Charlie McElligott stated in a report on Tuesday that the actual positions of market makers "are likely to prevent further deep-scale selling from now until the end of the year."

Market participants also attribute the moderate trend in the US stock market to other factors, including funds and commodity traders targeting low volatility, as well as the historical trend of low volatility index remaining subdued after touching the bottom of the trading range.

This calm volatility trend is likely to continue until the release of the Federal Reserve interest rate decision on Wednesday Eastern Time. Although the market generally expects the Fed to keep interest rates unchanged, investors are still eager to obtain hints of whether policymakers will imply an earlier start to an interest rate cut cycle. This expectation has greatly driven the strong rebound in the US stock market this quarter. Interest rate futures traders are betting that the Fed will cut the benchmark interest rate by more than one percentage point in 2024, and the market is betting that the first rate cut will start in March next year. However, major Wall Street banks such as Goldman Sachs believe that this expectation is too aggressive.

Goldman Sachs economists expect the Fed to start cutting interest rates by 50 basis points from the third quarter of next year. This is less than half of the expected 125 basis points rate cut in the interest rate futures market.

Brent Kochuba, the founder of options analysis service company SpotGamma, said that the expiration of options may relax the actual control of the options market over the US stock market.

Kochuba emphasized that a similar situation occurred in the market two years ago, when options of a similar scale also expired. However, during part of the fourth quarter, it suppressed the volatility of the US stock market, and even after the wave of options expiration in December, the market only rebounded by less than 3%. Therefore, Kochuba said, "All these positive gamma factors are impacting the market, and as a result, market volatility is being controlled."