At the start of the week, we warned of the potential for upheaval in markets that today's near-record-breaking options-expiration (and quad witch) could cause as a massive amount of gamma and delta expire and are de-risked, in the process eliminating one of the natural downside stock buffers (see "4 Reasons Why The Market Doldrums End With Next Friday's Op-Ex").
Anyone who 'traded' yesterday's markets knows that is true and today could be even more wild as Goldman points out that today will be the second largest single stock options expiration in history, with $818bn of single stock options set to expire (only Jan-2021 was larger).
Broadly, total open interest on single stocks has increased to nearly $3tn, the highest level since January of this year, as daily options trading activity continues to exceed shares traded (single stock options volumes have been 104% of shares volumes over the past month). Volumes are concentrated in short term contracts, with 71% of all contracts traded in options with less than 2 weeks to expiry; this compares to the long-term average of 57%.
Additionally, Goldman's Derivatives Research Group notes that today's expiry could be important for stocks with large open interest in at-the-money (ATM) options; market makers delta-hedging their unusually large options portfolios will be active. This flow is likely to dampen volatility in some names while exacerbating stock price moves in others. Names to focus on include HLT, VLO, IBM, GM, GOOGL and CRM.
Specifically, Goldman warns that open interest in ATM options expiring on Friday may impact stock trading.
At major expirations, options traders track situations where a large amount of open interest is set to expire. In situations where there is a significant amount of expiring open interest in at-the-money strikes (strike prices at or very near the current stock price), delta-hedging activity can impact the underlying stock’s trading that day. If market makers or other options traders who delta-hedge their positions are net long ATM options, expiration-related flow could have the effect of dampening stock price movements, causing the stock price to settle near the strike with large open interest. This situation is often referred to as a “pin” and can be an ideal situation for a large investor trying to enter/exit a stock position. Alternatively, if delta-hedgers are net short ATM options (have a “negative gamma” position), their hedging activity could exacerbate stock price moves.
The following stocks are where option activity could have big impact
Stocks where a large percentage of contracts, relative to their average daily volume traded, expire today, potentially leading to “pinning”. Expiration-related trades may cause trading activity to pick up for stocks with a significant amount of ATM open interest.
At the index level, SpotGamma notes, the level of gamma & delta reduction is what we are watching for now.
The amount of delta & gamma that expires is quite dependent on where markets are at the time of expiration (9:30 AM EST for SPX, 4PM for everything else). You can see that at 4200 (the 0 gamma point) there is not much change – but the issue for the bullish case is the sizeable delta that expires today.
As you can see on the chart below, there is a sizeable amount of SPX delta that expires. The implication here is that dealers may have a substantial amount of long delta hedges (ie long futures) to unwind.
On net our view here is simple: volatility is set to expand. Whether that manifests in a rip higher, or a drop lower remains to be seen. As long as markets hold the Volatility Trigger level (around 4195 for SPX) then we give bulls the benefit of the doubt. Below there is high risk as markets could enter a nasty cycle of reflexive gamma selling.
There is, however, some silver lining to all this pre-opex chaos, as SpotGamma notes that the “shape” of gamma has changed dramatically from yesterday into today. Yesterday this model showed a fairly dramatic slope from 4225 down to 4060 – but today this model flattens out at 4160 as seen here.
This reads as less downside potential.