Market's Triple Witching Day: What Traders Can Expect
Market's Triple Witching Day: What Traders Can Expect
As excitement fills the financial air following a bullish session, with major indices like the S&P 500 and the Dow Jones achieving record highs, traders are preparing for what is often a tumultuous end to the week. The recent uptick in investor risk appetite surged after a notable 0.5% interest rate cut by the Federal Reserve, setting the stage for heightened volatility.
Friday is characterized as a “Triple Witching” day, an event where stock index futures, stock index options, and individual stock options all expire on the same day. This unique occurrence, which is known to introduce significant market turbulence, has traders on alert.
Goldman Sachs estimates that over $4.5 trillion in notional options exposure is set to expire, including approximately $605 billion in single-stock options. According to insights from derivatives analysts at Asym 500, when factoring in options linked to ETFs, the total notional options expiring this Friday could reach around $5.1 trillion.
“This Friday marks the largest September-options expiration on record, propelled by high volumes in index and ETF options,” noted John Marshall, an analyst at Goldman Sachs. Although this September expiration is expected to set a new benchmark, it may still trail behind the quarterly expirations seen earlier in the year.
A Record-Breaking Expiration Day
Goldman Sachs observed that average daily trading volumes for index and ETF options have broken records this quarter, while single-stock options trading is experiencing a decline. The substantial volume of expiring options on Friday has the potential to initiate a wave of volatility, as traders could be compelled to adjust their market positions. The recent Fed rate cuts might not effectively stabilize the anticipated market fluctuations.
Could this Triple Witching day disrupt the recent market rally stimulated by the Federal Reserve's actions?
What Is ‘Triple Witching’? How Did Markets Previously Perform?
Triple witching refers to the simultaneous expiration of stock index futures, stock index options, and single-stock options occurring quarterly on the third Friday of March, June, September, and December. This particular event can create an atmosphere of enhanced volatility in the markets, as traders close, roll over, or settle their expiring contracts, often leading to unusual price movements and spikes in trading volumes.
Historically, during the last three Triple Witching occurrences, the S&P 500, tracked by the SPDR S&P 500 ETF Trust (SPY), has faced challenges on these critical trading days:
- June 21, 2024: The S&P 500 declined by 0.5%.
- March 15, 2024: The index fell by 1%.
- Dec. 15, 2023: The S&P 500 dropped by 0.6%.
Tech stocks represented by the Invesco QQQ Trust (QQQ) also faced the brunt of the volatility during the recent Triple Witching events, slipping by 0.8% in June and 1.2% in March while climbing 0.5% in December 2023.
Goldman Sachs Recommends VIX Calls Ahead of Volatility Spike
September is typically regarded as the least favorable month for stock market performance. Ryan Detrick, a chief market strategist, pointed out that the final two weeks of September historically present the toughest conditions for stocks during the calendar year, as observed in recent analyses.
The CBOE Volatility Index (VIX), often dubbed the market's fear gauge, has seen a significant drop after peaking in August. Currently, the index sits around 17, significantly below its long-term average.
Goldman Sachs anticipates that as we transition into a season noted for volatility, the VIX may rise. Their economic model suggests that, based on macroeconomic factors, the VIX should be around 24.5, implying that the current low volatility may soon vanish. To prepare for potential market swings, Goldman Sachs has advised investors to consider hedging their portfolios with VIX calls, particularly focusing on CBOE Volatility Index (VIX) call options for November with a strike price set at 18.
Frequently Asked Questions
What is Triple Witching?
Triple Witching is the simultaneous expiration of stock index futures, stock index options, and individual stock options on a specific day, leading to increased trading activity and volatility.
How does Triple Witching affect the markets?
It often results in unusual price movements and heightened volatility as traders scramble to settle, roll over, or close their contracts.
What is the significance of the $5 trillion options expiration?
The large notional value of expiring options could lead to significant volatility in the stock markets, influencing trading strategies and market movements.
Why is September considered a bad month for stocks?
Historical trends indicate that September is typically characterized by poor stock performance and increased market volatility.
What strategies do analysts recommend during Triple Witching?
Analysts like Goldman Sachs suggest utilizing VIX calls as a hedge against volatility that often accompanies Triple Witching days.
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