Traders on guard with $2.5 trillion in options set to expire and Wall Street’s ‘fear gauge’ at a 6-month high

Traders on guard with $2.5 trillion in options set to expire and Wall Street’s ‘fear gauge’ at a 6-month high

Wall Street’s fear gauge was testing its highest levels of the year on Thursday just as stock options tied to $2.5 trillion in market value are set to expire. That could portend a bumpy ride ahead for stocks.

Asym50 founder Rocky Fishman shared a note with MarketWatch on Thursday where he showed that options with a trillion in notional value linked to single stocks, stock indexes, exchange-traded funds and index futures are all set to expire on Friday. Of the $2.5 trillion, $1.7 trillion worth are tied to the S&P 500 either through futures, the SPDR S&P 500 Trust ETF SPY, or cash-settled contracts that track the index.

Large option expiration days typically lead to a flurry of trading on the 16 U.S. options exchanges, which can occasionally spill over into the broader market, causing more intraday volatility.

But a recent jump in Wall Street’s fear gauge has prompted some on Wall Street to watch Friday’s expiration even more closely, making it unusually significant for a monthly expiry where no futures contracts are expiring. Typically “triple witching” days see a larger slug of options expire.

“The rising Vix is definitely making [Friday’s] expiration more interesting,” said Joe Ferrara, investment strategist at Gateway Investment Advisers.

The Cboe Volatility Index VIX, better known as the Vix or Wall Street’s “fear gauge,” finished north of 21 on Thursday, according to FactSet data. That’s the highest level since March 24, according to FactSet data, a six-month high.

That puts the fear gauge above its long-term average of 19.6. It also marks the first time the Vix has closed above 20 in 101 trading sessions, ending the longest such stretch since 2018, according to data from Tier1 Alpha.

Ferrara said a rising Vix could be a sign of more pain to come for markets. But a rising Vix also increases the value of S&P 500-linked options, which should benefit option-selling strategies that have become increasingly popular this year. Ferrara’s firm manages a mutual fund that sells covered option contracts to generate additional returns.

Strategies like shorting volatility by selling options have seen a surge in popularity this year, as MarketWatch reported back in August.

n a note to clients shared with MarketWatch on Monday, Charlie McElligott, a derivatives strategist at Nomura, said ‘short vol’ players have been “circling like sharks” to take advantage of this latest richening in option premium driven by the higher Vix.

Ferrara also pointed out that the JPMorgan Equity Premium Income JEPI, better known by its ticker, JEPI, has seen sizable inflows this year as its strategy of selling covered calls has become increasingly popular among investors.

JEPI has seen $16.2 billion in inflows over the past year, according to FactSet data.

Rising Treasury yields are also making traders nervous. As the 10-year Treasury yield BX:TMUBMUSD10Y pushed toward 5% on Thursday, hitting fresh 16-year highs along the way, U.S. stocks sold off, with the S&P 500 closing 0.9% lower at 4,278.

error: Content is protected !!