Historic $3.4 trillion U.S. options expiry set to intensify market volatility

The U.S. options market is anticipating a potentially historic day today, as contracts linked to $3.4 trillion worth of U.S. equities, ETFs, and indexes such as the S&P 500 are due to expire, according to data from Goldman Sachs Group (NYSE:)’s head of derivatives research, John Marshall. This event is set to be the largest September expiry on record and could lead to increased market volatility.

Trading in U.S. stock options, particularly zero-day to expiration options, has been flourishing recently. Goldman Sachs’ analysis revealed that almost $2 trillion of options will expire this Friday morning, with single-stock options valued at $555 billion set to expire later in the day.

In options-market terminology, the notional value signifies the worth of the underlying securities or indexes controlled by the option. Typically, index options are settled in cash, while single stocks and ETFs options are settled in shares.

Due to recent fluctuations in U.S. stocks, a significant proportion of options expiring today are close to being in the money, which could exacerbate market turbulence. Wall Street often associates quarterly options expiry days with irregular markets.

Today’s expiration is projected to be the sixth-largest monthly expiration ever recorded and the largest for September. Marshall finds this surge in open interest unexpected given the relatively quiet state of stock-market volatility.

Marshall also noted an increase in trading volume for short-dated options with less than 24 hours until expiration. These now constitute 49% of activity in S&P 500 index options. The rise in index and ETF-linked options trading has fueled the increase in open interest ahead of this month’s key event.

Charlie McElligott from Nomura warned clients about possible volatility. Historically, 10 out of the past 11 September op-ex days have seen the S&P 500 finish lower, with a median return of -0.5%. Furthermore, data show that the week following September op-ex typically sees a turbulent period for stocks. September is generally the worst performing month for the S&P 500.

McElligott also pointed out that an unusually large volume of exposure on options dealers’ books is due to disappear today. This could trigger more volatility as traders establish new positions to replace expiring options. Larger quarterly option expiration events often coincide with short-term market weakness, according to Nomura’s analysis.

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