A $4.2 Trillion Options Event Looms for New Bull Market

Friday is "Four Witching Days," a quarterly financial derivative expiration date for U.S. stocks that occurs on the third Friday of March, June, September, and December each year. On this day, stock index futures, stock index options, individual stock futures and individual stock options expire at the same time. This is accompanied by a significant increase in trading volume and large swings in stock and derivative prices.
Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, believes that current traders are likely to roll their call option positions, also rolling positions that expire on Friday to a later term, especially those OTM calls. The reason is that people are not high enough on the overall stock market positions and need to hold their positions. The overall impact of this action on the market is unknown though.
Analysts point out that the current U.S. options market has become so large that it is affecting the stock market landscape, with a range of options-related strategies driving the recent rally in the broader U.S. stock market:
- The recent rush by investors to buy calls and close out their previous put option positions has pushed the broader U.S. stock market higher.
- There is another type of action that can also push the broader U.S. stock market higher. For example, some traders buy back deep ITM calls before they expire this Friday and then sell new contracts that expire next month, a process that requires them to buy stocks as a hedge.
- During the banking turmoil in March and the depth of the U.S. debt ceiling crisis in May, investor demand for put options was high. And that corresponded with market makers selling puts, which required them to sell stocks to hedge their risk in order to achieve a neutral position. And in June, all of the above actions are reversed as the risk events settle and investors withdraw their related bets, which means that market makers buy stocks, boosting the June rally in U.S. stocks.
- Another important event in recent months has been the market's frenzied embrace of artificial intelligence. just a few months ago, I remember the overwhelmingly pessimistic investor consensus," said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. When did the inflection point begin? Better economic data, a blowout earnings report from Nvidia, and that familiar, train-is-about-to-leave-the-station feeling among investors who are underweight stocks."