Tonight's U.S. stock market is not calm? $30 trillion massive options expiration, Goldman Sachs: This time is different

On Friday, October 18th, local time, it is the tenth options expiration date for the US stock market in 2024, and also the last opportunity to close options positions before the US presidential election.

Specifically, $3 trillion (nominal value) of options contracts will expire at 4 p.m. local time on Friday, with $1.9 trillion related to the S&P 500 Index (SPX) expiring on Friday morning, and the remaining $1.1 trillion in options on exchange-traded funds (ETFs) and individual stocks expiring at the end of the day on Friday.

This is the largest October options expiration since 2017, but smaller than typical quarterly expiration sizes in recent years. The large number of options expiring may bring significant volatility to market sentiment and prices.

However, it is worth noting that the market environment for this options expiration is different from the past. Implied volatility is currently relatively high, gamma values of options are high (options prices are more sensitive to changes in underlying asset prices), there is general concern in the market, and open interest in VIX-related options and futures is at its lowest level in nearly two years.

"This Time is Different"

Goldman Sachs analyst Brian Garrett pointed out that there has not been an expected significant drop in the US stock market before the election:

In the past few weeks, the market hesitated to "buy in", with everyone's strategy seemingly suggesting to sell before the election and then rebound by the end of the year. October usually sees significant seasonal volatility or declines in the stock market.

However, the market did not experience the expected decline before the election. With no volatility approaching the election, investors are forced to consider a scenario: "What if the market actually doesn't drop? And my current position is very light."

Of particular note is that the open interest in VIX call options is at its lowest level in nearly two years.

This week sees the largest ever expiration of call options, and the open interest in the market is also very low, which could trigger some market adjustments.

Furthermore, Goldman Sachs points out that this is a good time to sell put options:

Given the decrease in short interest in VIX (volatility index) among traders, investors expect market volatility to decrease and trade strategies accordingly, such as selling put options; after the election, unless there are significant unknown risks, the current market skew may not persist, and traders may need to hedge against the risk of a significant drop in VIX.

Volatility Has Not Risen as Usual

Goldman Sachs also observed:

The US stock market has set several historical highs in the past few weeks. Typically, when the price of underlying assets (such as stock indices) rises, their implied volatility also increases, as market participants' expectations of future price movements increase. However, this time is different. Despite reaching new highs, volatility has not risen as usual.

In the past month, the S&P 500 Index has risen by 4%, but there has been no buying interest in call options. Goldman Sachs stated:

In the past fifteen years, new historical highs have almost always been accompanied by demand for "FOMO call options". As investors buy call options with exercise prices far above the current market price, this is manifested in an increase in spot volatility correlations