Stocks of the United States are set for wild swings with trillions of options contracts expiring Friday
The Friday ,... expiration of option contracts that are tied to trillions in securities could cause stocks to experience more wild swings.
The expiration of options contracts involving trillions of dollars worth of securities on Friday could lead to more wild swings in U. S. stocks. This will remove a buffer that some belief has prevented the S&P 500 index from trading out of a tight trading range.
Triple witching is when options contracts and equity futures tied to individual stocks or indexes -- as well as exchange-traded funds -- all expire on a single day. Some option contracts expire in the morning while others expire afternoon. This happens approximately four times per year, or once every quarter.
Goldman's top derivatives analyst sees stocks soaring in the future as a rash if contracts that helped to reduce volatility in the equity markets expire.
Options that expire Friday could "remove a 4k pinner who has kept a lid upon big moves," Scott Rubner, a top derivatives strategist at Goldman and managing director, said in a note to clients, obtained by MarketWatch. This could make it more vulnerable to a major swing in either direction.
These levels correspond to some of the most sought-after strike prices for options that are tied to the S&P 500 according to Rubner's data. A strike price refers to the level at which a contract holder has the opportunity, but not the obligation, to buy or sell security depending on the type of option.
This trend has had one result: it has helped keep stocks within a narrow range while fueling more intraday swings. Many traders have compared this pattern to the "game ping pong."
SpotGamma founder Brent Kochuba said that trading in 0DTEs helped the S&P 500 keep below the 3,800 level earlier this week as markets reeled after the closures of three U. S. banks.
Analysts believe this is why the Cboe Volatility Index VIX (+10.96%), also known as the Vix or Wall Street Volatility gauge, has remained so subdued compared to the ICE BofAML MOVE Index which is a gauge for implied volatility for the Treasury market, Kochuba, and others stated to MarketWatch.
The MOVE index stunned traders earlier this week, as volatility in normally calm Treasurys caused it to surge to its highest point since the 2008 financial crisis. The Vix VIX was unable to surpass 30 - a level it has not been since October.
Large slugs worth of options contracts will expire in the coming week, but Friday is not the only session. A slug of Vix-related contracts will expire Wednesday as the Federal Reserve announces its latest interest rate-hike decision.
This could allow the Vix to "catch up" with the MOVE, which could lead to a sharp stock market selloff, according to Sam Skinner and Alon Rosin, two equity derivatives experts at Oppenheimer.
Amy Wu Silverman, a strategist for equity derivatives at RBC Capital Markets, shared a similar opinion. MarketWatch received her email comments, in which she stated that she expects "volatility to remain elevated" heading into next week's Fed meeting.
Futures traders see a high probability that the Fed will raise its policy rate by 25 base points. According to CME's FedWatch tool, traders still see a 20% chance that Fed will raise interest rates.
U. S. stocks fell Friday after concerns about stability in the banking sector resurfaced following a bankruptcy filing by SVB Financial Group, and the release of data showing that banks borrowed $165 billion from Federal Reserve over the last week.business