Wall Street braces for volatile "Triple Witching" day as record options expire
After a bullish Thursday session, with both the S&P 500 and the Dow Jones hitting record highs, fueled by a bold 0.5% rate cut by the Federal Reserve, traders are gearing up for a potentially volatile Friday. This comes as the market prepares for the notorious "Triple Witching" day, a quarterly event when stock index futures, stock index options, and individual stock options expire simultaneously. Historically, this convergence has been known to create heightened market turbulence.
Key Takeaways:
- Record-breaking options expiration: Goldman Sachs estimates over \$4.5 trillion in notional options exposure will expire on Friday, including \$605 billion in single-stock options. Bloomberg, citing Asym 500, pegs the total notional options expiring at \$5.1 trillion, including those tied to ETFs.
- Elevated volatility expected: The sheer volume expiring could trigger a wave of volatility as traders adjust positions. This, coupled with the recent rate cut, may not be enough to quell potential market fluctuations.
- Historically weak triple witching days: Looking back at recent triple witching events, the SPDR S&P 500 ETF Trust (SPY) witnessed declines, with the S&P 500 dropping 0.5% in June 2024, 1% in March 2024, and 0.6% in December 2023.
- Goldman Sachs recommends VIX calls: The investment bank advises buying CBOE Volatility Index (VIX) November calls at a strike price of 18 to hedge portfolios against potential volatility. This is based on Goldman Sachs’ model estimating that the VIX should be at 24.5, suggesting the current low volatility may not last long.
A deeper look into Triple Witching
What exactly is "Triple Witching" and why does it matter?
"Triple Witching" refers to the simultaneous expiration of three types of derivative contracts—stock index futures, stock index options, and single-stock options—on the same day, occurring quarterly on the third Friday of March, June, September, and December. These expirations require traders to close, roll over, or offset their expiring contracts, often resulting in unusual price movements and increased trading volumes.
How did the market perform in previous Triple Witching events?
While the S&P 500 has historically struggled during triple witching days, with the index experiencing notable dips in recent events, Invesco QQQ Trust (QQQ), representing tech stocks, has performed differently, declining in the last two triple witching events (June and March) and surging in December 2023.
Why focus on this upcoming event?
This upcoming "Triple Witching" day is expected to be the largest September options expiration on record, driven by elevated index and ETF options volumes. As Goldman Sachs Analyst John Marshall points out, the sheer magnitude of expiring options could exacerbate market volatility. While the event will set a new record for September, it is expected to be smaller than previous quarterly expirations in 2024.
Goldman Sachs highlights heightened volatility and recommends hedging strategy
The current low volatility, as measured by the CBOE Volatility Index (VIX), which is sitting at 17, might be short-lived. Goldman Sachs believes the VIX is poised to rise as we enter a seasonally volatile period. This sentiment is backed by their economic model estimating that, considering macroeconomic conditions, the VIX should actually be at 24.5.
September is historically the worst month for stock market performance, with the last two weeks of the month identified as the worst period for stocks during the year, according to Ryan Detrick, chief market strategist at Carson Group. This makes the upcoming "Triple Witching" day an even more critical event to watch closely.
Given the potential for heightened volatility, Goldman Sachs recommends investors hedge their portfolios using VIX calls. Specifically, they advise buying CBOE Volatility Index (VIX) November calls at a strike price of 18. This strategy aims to provide protection against unexpected market swings during a period known for its historically volatile nature.
Navigating the volatile landscape
As Friday approaches, traders are navigating a complex landscape. The Federal Reserve’s recent rate cut has injected a dose of optimism, but the "Triple Witching" day looms large. Whether the record-breaking options expiration day will spoil the market rally ignited by the Fed remains to be seen. One thing is clear: the market is primed for volatility, requiring careful monitoring and potentially strategic hedging strategies.
