Tonight's US Stocks Unsettled? $3T Options Expiry, Goldman Sachs: This Time It's Different

On Friday, October 18th, local time, it was the tenth option expiration date for U.S. stocks in 2024 and the last opportunity to close options positions before the U.S. general election.

Specifically, options contracts with a notional value of $3 trillion will expire at 4 p.m. local time on Friday, of which $1.9 trillion in options related to the S&P 500 Index (SPX) will expire in the morning on Friday, and the remaining $1.1 trillion in options on exchange-traded funds (ETFs) and individual stocks will expire at the end of Friday.

This is the largest October options expiration since 2017, but it is smaller than the typical quarterly expiration size in recent years. The expiration of a large number of options may cause significant fluctuations in market sentiment and prices.

However, it is worth mentioning that the market environment for this options expiration is different from the past. Implied volatility is already relatively high, and the gamma value of options is high (options prices are more sensitive to changes in the price of the underlying asset). There is widespread concern in the market, and interest in VIX-related options and futures open interest contracts is at its lowest level in two years.

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"This time is different," said Goldman Sachs analyst Brian Garrett, noting that the U.S. stock market has not seen the expected sharp decline:

In the past few weeks, the market has been hesitant to "buy," and everyone's strategy seems to suggest selling and then rising before the end of the year. U.S. stocks usually have significant seasonal fluctuations or declines in October.

However, the market did not decline as expected. As it approaches without volatility, investors are forced to consider a scenario: "What if the market actually does not decline? And my current position is very light."

More notably, the number of open interest contracts for VIX call options is at its lowest level in two years.

This week, the largest call option contract in history expired, and the open interest contracts in the market are also low, which may trigger some adjustments in the market.Further examination reveals that Goldman Sachs points out that this is suitable for selling put options:

Given that dealers have reduced their short positions on the rise of the VIX (Volatility Index), investors anticipate a decrease in market volatility and adopt trading strategies accordingly, such as selling put options; after the election, unless there is a significant unknown risk, the current market skew may not persist, and dealers may need to hedge against the risk of a sharp decline in VIX.

Volatility has not risen as usual

Goldman Sachs also observed that:

U.S. stocks have set several historical highs in the past few weeks. Typically, when the price of the underlying asset (such as a stock index) rises, its implied volatility also increases because market participants' expectations for future price movements increase. However, this time it is different. Despite the market reaching new highs, volatility has not risen as usual.

In the past month, the S&P 500 index has risen by 4%, but there has been no buying of call options. Goldman Sachs stated:

In the past fifteen years, new historical highs have almost always been accompanied by demand for "FOMO call options." As investors purchase call options with strike prices far above the current market price, this is manifested as an increase in spot volatility correlation.