As discussed previously, some $703BN of single stock options will expire today, the 3rd highest notional for a non-January expiration, which in turn will unlock a substantial amount of gamma and could lead to further volatility next week.
The significant increase in options trading activity since early 2020, has prompted many investors to question if the days around expiry have been associated with higher-than-normal volatility, writes Goldman's derivatives strategist Rocky Fishman, whose analysis of S&P 500 returns, and changes in average stock volatility, shows the increase in volatility around expiries in 2021 is broadly consistent with the post-COVID rise in equity market volatility. The exception is volatility on the first day after monthly expiration, which has increased nearly 2X relative to the 2012-19 period.
The bank's analysis compares the days around expiries in 2021 to similar periods in 2012-2019 (and excludes 2020, given unique circumstances around the COVID-19 pandemic). It found that the S&P 500 move on expiry days in 2021 has been consistent with past periods, after accounting for the broad increase in equity market volatility following the pandemic. Average moves on the 3 days leading into expiration have actually been slightly lower than the pre-pandemic period.
The outlier has been the first day of trading after a monthly expiry, where the S&P 500 has averaged +/-1.0% move in 2021, nearly 2X the move in the 2012-2019 periods. This move is also consistent with changes in S&P 500 average stock one month implied volatility; an average change of 1.8 vol points in 2021, more than 2X the change in 2012-2019.
As Goldman concludes, the fact that the index realizes above-average moves in 8 of the 9 instances, is an important dynamic for investors to focus on when approaching monthly expiration.