$5 Trillion at Stake: 'Triple Witching Day' May See Largest US Options Expiry Ever

According to estimates by Goldman Sachs analyst John Marshall, the scale of options expiration in the U.S. stock market on this Friday's triple witching day will be the largest in history, with the notional value of expiring options exceeding $5.1 trillion, surpassing the scale of December last year, when $4.9 trillion set a historical record.

The potential record-setting scale is driven by individual stock options, with Goldman Sachs estimating that the notional value of these options could reach a record $870 billion.

Triple witching day refers to the simultaneous expiration of index futures, index options, and individual stock options. This occurs quarterly and often leads to a significant increase in volatility in the U.S. stock market.

The notional value of options expiring on Friday represents 9.3% of the Russell 3000 index's market value. This proportion is higher than most months, second only to December 2023.

Nearly half of the S&P 500 options are still end-of-day options. Current retail trading remains very active, with the proportion of S&P 500 index SPX one-hand options and end-of-day one-hand options in total trading still high.

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The trading volume of call options for index and individual stock options has increased, while the trading volume of put options for individual stock options has decreased.

Although most of the increase in options activity is due to retail investors participating in the狂欢 of large technology stocks and hedge funds chasing returns, it is worth noting that the earnings season in the second quarter of this year is unusual, with stocks experiencing greater volatility on earnings days than in the past eight quarters, with an average volatility of ±4.6% on earnings days.

The volatility ratio on earnings days to non-earnings days is 4.2, rising to the highest level since the third quarter of 2018. This is the actual volatility situation, while the options market has overestimated the volatility on earnings days, pricing it at ±5.8%, higher than the long-term average of ±5.1%.

Although the concentrated expiration of options, known as OPEX, has always supported the U.S. stock market, SpotGamma's analysis points out that a "weak window" will open at the beginning of next week.

It is expected that after the expiration of options, the positive gamma of the S&P 500 index will decrease by about one-third, and from Monday next week, the market will be more free to fluctuate.It should be noted that a positive gamma position can play a role in stabilizing the market, as these positions force holders to engage in buying low and selling high during price fluctuations, thereby reducing market volatility.

When the price of the underlying asset rises, positive gamma increases delta, thereby increasing the value of the option; when the price of the underlying asset falls, positive gamma decreases delta, thereby slowing down the decline in the value of the option.

SpotGamma observes that there is a significant accumulation of positions at 5550 points in the S&P 500 index, indicating that the bullish wall for SPX may rise, which will raise the upper limit of the trading range (currently at 5500 points).

This increase is due to the steady rise of SPX every day; new positions are added at higher levels; significant volatility in major individual stocks also pulls up the index. However, it is expected that weakness will emerge after the expiration of options, testing the 5400 point level.

SpotGamma also notes that with the expiration of options on Friday, Nvidia will lose about half of its gamma, which may dampen its momentum. In addition, it is rare to see open interest > 140.

The volatility of individual stocks can breed instability. It is unlikely to shift from the extreme situation of "rising stock prices, rising volatility" to "flat stock prices, declining volatility", and it is more likely to be "falling stock prices, volatility remains high".