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4 Key Observations Ahead Of Friday’s $3.3 Trillion Option Expiration

Courtesy of ZeroHedge View original post here.

As Goldman’s head of FX sales Tony Pasquariello said on Friday, “next week is a huge one, featuring the FOMC on Wednesday and a major derivatives expiry on Friday.”

While much digital ink will be spilled in the next 48 hours dissecting the Fed’s next move which will most likely be the first 25bps hike in over two years, instead we will focus on next Friday’s March options expiration, which sees a massive $3.3tln of derivative notional expiring, not only right after the FOMC decision but also in the midst of a complex geopolitical situation.

Overall, some 30% of S&P open interest expires on March 18.

To help traders, Goldman’s in house derivatives expert Rocky Fishman has looked at option positioning in this rising-volatility environment, and makes the following four key observations ahead of Friday’s op-ex:

1. SPX – and all asset classes’ – volatility has been rising quickly. A complex convergence of catalysts has helped drive the VIX into the 30′s, and even more substantial increases in volatility across asset classes. The large upcoming equity options expiration adds a positioning element to the mix. In addition to the potential for large delta-hedging of expiring near-the-money option positions, option trading volumes tend to be elevated in the week of quarterly expirations as investors re-structure hedges.

2. Largest amount of near-the-money SPX open interest since 2019. Although the trend of quarterly option expirations falling in importance as investors use the full calendar of expirations remains intact, the upcoming March quarterly has the potential to be more important than recent quarterlies because it has more near-the-money open interest than recent ones have had.

The reasons a larger percentage of its open interest are near the money are that (1) the March expiration has had unusually high recent trading volume…

… leaving more of its open interest new instead of aged…

… (2) the equity sell-off has returned the spot index to an area where much of the open interest was originally established.

3. Volume has shifted away from single stock options, toward index options. Index/ETF option volume has been nearly as high as its early 2020 peak, when adjusted for the size of the equity market. This high volume includes both ultra-short-dated options expiring each Monday, Wednesday, and Friday, and also the March monthly volume. As macro themes have dominated, single stock option volumes have fallen sharply compared with their late 2021 peak, even though they remain large compared with pre-2020.

Single stock option markets are less call-heavy than normal.

4. Weak liquidity and reduced close-to-close vol send opposing signals on gamma. The net gamma position of delta hedgers is difficult to know but overall, Goldman believes that the upcoming expiry leans toward short “street gamma” (potentially making markets more volatile), with the ongoing high implied-realized volatility spread and weak futures liquidity (including a high frequency of “wide” markets) supporting the idea that options have generally been bought and there may be sizable delta-hedging of short gamma positions.

The trend toward intraday price-reversion, with close-to-close realized volatility well below intraday-to-intraday, would point toward long “street gamma”, but it has been fading.

Following next week, a reduced catalyst calendar and cleaner positioning has the potential to reduce volatility.


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