The biggest "Triple Witching Day" in history coincides with index adjustments. Can the US stock market remain "calm"?

According to the financial news app Zhitong Finance, the US stock market will welcome the "Triple Witching Day" on Friday, when a record amount of options will expire, potentially bringing short-term volatility to the market.

According to the estimation of the options platform SpotGamma, this "Triple Witching Day" will see approximately $5.5 trillion worth of options expiring. "Triple Witching Day" refers to the day when ETFs, stocks, and index options all expire simultaneously. This situation occurs once every quarter, specifically on the third Friday of March, June, September, and December each year, leading to a surge in trading volume and sudden price fluctuations.

As the Triple Witching Day approaches, the implied volatility of the S&P 500 index options is close to the lowest level before the COVID-19 pandemic, benefiting from the surge in benchmark index due to NVIDIA (NVDA.US) and other artificial intelligence-related stocks. The options expiration coincides with the index rebalancing, where the S&P Dow Jones Index will adjust the component stock weights, and ETFs tracking the index will also adjust their holdings.

The expiration of options on Friday may push up the VIX index.

US Stock Market May Experience Turbulence

Scott Rubner, Managing Director and Strategy Specialist at Goldman Sachs Global Markets Division, stated that after these positions are unwound, the market may experience some turbulence, with an estimated $5 billion in so-called "long gamma" positions expected to be brought in.

Rubner mentioned that a series of events on Friday, along with the Russell Index adjustment next Friday, "will lead to explosive trading periods, as we have seen traditional asset management companies more actively utilizing excess trading volume and strategic trading positions."

Brent Kochuba, the founder of SpotGamma, stated that this time, the expiration value of call options is about 11 times higher than the nominal value of put options. Last quarter, this ratio was close to 5:1. The widening gap indicates a growing demand for upside risk exposure, while the demand for put options is shrinking. He mentioned that this could also lead to slight declines in trading-active benchmark indices and stocks on Friday and early next week.

Kochuba said, "There are too many call options in the mix." "This situation will start to consolidate, and the market will become more volatile."

Is the Impact Exaggerated?

While retail investors may hardly notice these events, traders will certainly take note. For them, a large number of options expiring means difficult choices: rolling over or offsetting positions, or closing them entirely. This turmoil could stimulate more volatility, especially in the last hour of trading, known as the "witching hour."

The estimated scale of expiring options varies depending on analysts' calculations. Goldman Sachs analyst John Marshall estimates that the scale of expiring options this Friday will be the largest ever, with a nominal value exceeding $5.1 trillion, surpassing the historical high of $4.9 trillion set in December last yearCitigroup expects a smaller scale of $48 trillion.

Market participants warn that the impact of quarterly options expiration is often exaggerated. However, even a slight fluctuation in the stock market may differ from the recent extreme calm. Rocky Fishman, founder of derivatives analysis company Asym 500, said that while the nominal value of expiring options may be growing, the entire market is also expanding.

Fishman said, "With the expansion of the economy and the rise in stock market value, all numbers will grow over time. But measured as a percentage of the stock market size, I am sure we are far behind December last year."

This quarter, except for a brief rebound in April, the Chicago Board Options Exchange Volatility Index (VIX) has remained near its lowest levels since early 2020. Selling options ETFs are becoming increasingly popular, coupled with the reduced daily volatility when stock indices rise, making traders reluctant to purchase products to guard against selling. The S&P 500 Index is expected to rise by about 4% in the second quarter, marking the third consecutive quarter of gains for the index.

Kochuba stated that NVIDIA will also play a more significant role this time. The expiring NVIDIA contract value ranks second among all underlying assets, second only to the S&P 500 Index. This overturns the previous pattern, indicating that this chip manufacturer has a huge influence in a broader market