After a bullish session on Thursday, with both the S&P 500 and the Dow Jones hitting record highs, spurred by increased risk appetite following a bold 0.5% rate cut by the Federal Reserve, traders are bracing for a volatile end to the week. Friday marks the notorious “Triple Witching” day, a convergence that historically stirs market turbulence.
This event, occurring on the third Friday of March, June, September, and December, marks the simultaneous expiration of three types of derivative contracts: stock index futures, stock index options, and single-stock options. This convergence can lead to heightened market volatility as traders close, roll over, or offset their expiring contracts, often resulting in unusual price movements and increased trading volumes.
Goldman Sachs estimates that over $4.5 trillion in notional options exposure will expire on Friday, including $605 billion in single-stock options. According to Bloomberg, using estimates from derivatives analytical firm Asym 500, the overall notional options expiring Friday reach $5.1 trillion when including options tied to ETFs. “This Friday will be the largest September-options expiration on record, driven by elevated index and ETF options volumes,” wrote Goldman Sachs analyst John Marshall.
While the September expiration will set a new record, it’s expected to be smaller than the previous quarterly expirations of 2024. Goldman Sachs highlighted that average daily index and ETF options volumes have reached a new high this quarter. In contrast, single-stock options trading has seen a decline.
The sheer magnitude of options expiring Friday could trigger a wave of volatility as traders scramble to adjust their position, and the Federal Reserve’s recent rate cut might not be enough to temper the storm.
Looking back at the last three triple witching events, the S&P 500, tracked by the SPDR S&P 500 ETF Trust SPY, has struggled during these high-stakes trading days. The index fell 0.5% on June 21, 2024, 1% on March 15, 2024, and 0.6% on December 15, 2023. Tech stocks, represented by the Invesco QQQ Trust QQQ, underperformed in the last two triple witching occasions, falling 0.8% in June and 1.2% in March, while surging 0.5% in December 2023.
September is historically the worst month for stock market performance. According to Ryan Detrick, chief market strategist at Carson Group, the last two weeks of September are the worst period for stocks during the year.
The CBOE Volatility Index (VIX), often referred to as the market’s fear gauge, has dropped significantly since its spike in August. The index is sitting at 17, well below its multiyear average, and Goldman Sachs sees the VIX on the rise as we enter the seasonally volatile period. Goldman Sachs’ economic model estimates that, given macroeconomic conditions, the VIX should be at 24.5, suggesting the current low volatility may not last much longer.
The investment bank issued a recommendation for investors to hedge their portfolios using VIX calls. Specifically, Goldman Sachs analysts advise buying CBOE Volatility Index (VIX) November calls at a strike price of 18.
