Today on Wall Street is the “day of the three witches”, one of the events most feared by investors. The third Friday of each quarter Stock index options, stock options and index futures all expire together. Volatility usually increases, especially in the last hour of trading, not surprisingly called the “three witching hour”. The increase in volatility is linked to the fact that traders have to make the rollinghedging or closing of existing transactions.
According to an estimate from the SpotGamma options platform, they will expire today on Wall Street 5.5 trillion dollars of options which risk causing an explosion in volumes. Citigroup estimates a smaller figure – 4,800 billion dollars – but the substance does not change. The amount should be in line with that of the previous deadlines in March and December, in which very intense market movements were noted.
Wall Street: the impacts of the three witches on the market
The day of the three witches on Wall Street comes at a time when options volatility is the lowest since the start of the pandemic. But what can happen to the American stock market today? Brent Kochuba, founder of SpotGamma, notes that the expiration value of call options is about 11 times that of puts. A much higher ratio than last quarter’s 5 times. This means stocks could fall today and early next week: “The options complex is too bullish. The market is going to get a little more volatile.”
It could play a fundamental role Nvidiaexplains Kochuba, since the value of expiring contracts linked to the chip giant is the second largest, after that of the S&P 500 index. This demonstrates “Nvidia’s outsized influence in the market”.
In the opinion of Scott Rubner, managing director of the global markets division and tactical specialist of Goldman Sachs Group, today’s session and next Friday’s session, in which the renewal of the Russell indices “will be explosive as classical asset managers more actively exploit excess volumes and tactically trade positions.”
However, some argue that concerns are overblown and that the impacts of quarterly options expiration tend to be overstated. Among the skeptics is for example Rocky Fishman, founder of the derivatives analysis firm Asym 500, who believes that “all numbers get bigger over time as the economy gets bigger and the value of the stock market grows”. Nonetheless, “I’m pretty sure we’re way behind where we were last December,” he said, referring to today’s numbers on the options market.
