Options Expiring: Wall Street Fear Gauge Surges as $2.5 Trillion at Stake

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Wall Street’s fear gauge, the Cboe Volatility Index (VIX), reached its highest level of the year on Thursday, coinciding with the expiration of stock options tied to a staggering $2.5 trillion in market value. This convergence of events could indicate a potentially turbulent period ahead for stocks.

According to Rocky Fishman, the founder of Asym50, a significant number of options with a total notional value of one trillion dollars linked to individual stocks, stock indexes, exchange-traded funds (ETFs), and index futures are scheduled to expire on Friday. Of the $2.5 trillion at stake, $1.7 trillion is associated with the S&P 500 through futures, the SPDR S&P 500 Trust ETF (SPY), or cash-settled contracts tracking the index.

Days with large option expirations typically lead to heightened trading activity across the 16 U.S. options exchanges. Occasionally, this increased volatility spills over into the broader market, further intensifying intraday fluctuations.

However, what sets this particular expiration day apart is the recent surge in Wall Street’s fear gauge, the VIX. This has prompted market participants to pay even closer attention to Friday’s expiration, given its unusually significant nature for a monthly expiration that does not involve futures contracts. Typically, days known as “triple witching” days witness a larger number of options expiring.

On Thursday, according to FactSet data, the VIX, also known as Wall Street’s “fear gauge,” closed above 21. This level represents a six-month high since March 24.

See: The short-volatility trade is making a comeback in 2023, six years after triggering a historic stock-market wipeout

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Fear Gauge Crosses Key Level as Volatility Rises

The fear gauge, also known as the Vix, has climbed above its long-term average of 19.6, signaling potential trouble ahead for the markets. This marks the first time in 101 trading sessions that the Vix has closed above 20, ending its longest stretch since 2018, according to data from Tier1 Alpha.

Opportunity for Option-Selling Strategies

Despite the market uncertainty, a rising Vix can also present opportunities for option-selling strategies. This increase in volatility raises the value of S&P 500-linked options, benefiting strategies that involve selling covered option contracts. Many investors have turned to these strategies, which have gained popularity throughout the year.

‘Short Vol’ Players Taking Advantage

According to derivatives strategist Charlie McElligott from Nomura, “short vol” players are capitalizing on the higher Vix and the resulting increase in option premiums. These investors, likened to circling sharks, have been quick to exploit the market conditions.

Rising Popularity of Covered Call Strategies

With the growing interest in option-selling strategies, the JPMorgan Equity Premium Income JEPI has seen significant inflows this year. This fund, known by its ticker JEPI, follows a strategy of selling covered calls to generate additional returns. In fact, it has attracted $16.2 billion in inflows over the past year, according to FactSet data.

Market Nerves Rising with Treasury Yields

Adding to the unease in the markets are the rising Treasury yields. As the 10-year Treasury yieldBX:TMUBMUSD10Y continues to climb towards 5%, reaching fresh 16-year highs, U.S. stocks have sold off. The S&P 500 closed 0.9% lower at 4,278 in response.

With volatility on the rise and market nerves increasing, investors and traders must navigate the current landscape carefully.

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