5 trillion worth of options expire today

More than $5 trillion worth of stock options, index options and stock index futures expire today. In addition, the S&P 500 and Nasdaq-100 will be rebalanced on the same day

More than $5 trillion worth of stock options, index options and stock index futures expire today. In addition, the S&P 500 and Nasdaq-100 will be rebalanced on the same day
More than $5 trillion worth of stock options, index options and stock index futures expire today. In addition, the S&P 500 and Nasdaq-100 will be rebalanced on the same day

The redemption volume reaches 8% of the SPX market capitalization. This is the maximum since 2012. Source: Google

Analysts warn that events could move quickly and volatility could be off the charts as billions of dollars worth of contracts and securities change hands on this day. The face value of options expiring today is $5.3 trillion, with the largest redemptions taking place before the start of the American session.

On the one hand, many traders will take profits on bullish positions, but some will choose to roll them over to the next period to maintain risk hedging. Index fund managers will have to complete adjustments to their holdings before the announced index changes take effect.

Trading volumes have been growing since the beginning of the week. On the American stock market, stock trading volume reached $17 billion, Steve Sosnick, chief market strategist at Interactive Brokers, said this during a telephone interview with News. For comparison: on Tuesday, trading volume did not exceed $10.6 billion.

 

“Tomorrow the volume of trade in popular categories will be huge,” Sosnik added. “This is the largest option expiration of the year, which is understandable, December is always like this. But that is not all. Today’s event will likely be the largest redemption of SPX options in the last ten years,” Fishman said in comments to MarketWatch.

 

Brent Kochuba, founder of options market analytics platform Spotgamma, went even further, saying “this is the largest options redemption ever.”
There is a distortion in the market

Traders were buying bull options at a record pace amid surging markets, according to data from Cboe Global Markets, the largest operator of options exchanges in the United States. Trading volume in S&P500-related options reached 4.8 million contracts on Thursday, surpassing the previous all-time high reached on November 14, according to Cboe. Additionally, total trading volume in call options on all U.S. stocks topped 30 million contracts on Wednesday, marking the strongest bullish contract activity this year, according to Goldman Sachs Group.

Aggressive stock buying over the past month has helped push the S&P 500 close to an all-time high (based on closing prices), options market experts say. The S&P 500 SPX rose 8.9% in November, which was the best month of 2023 of the year and the eighteenth-best month in the last 73 years. It continued to rise in December, according to FactSet data. Since the beginning of the month, the index has risen by 3.3%.

Earlier this week, analysts warned that markets could face trouble as the S&P 500 approaches the 4,600 level. They explained that a “wall” of open interest in call options near that level could force market makers to put the brakes on the rally. However, traders knocked down that wall and pushed the index to 4700. The S&P 500 closed at 4719.55 on Thursday, its highest close since Jan. 12, 2022, according to FactSet data. The index is currently within 1.75% of its record close set on January 3, 2022 at 4796.56.

Traders’ bullish sentiment recently helped push the Cboe VIX volatility index, also known as Wall Street’s “fear gauge,” to multi-year lows.

It’s not just options and S&P 500 contracts tied to popular stocks like Tesla Inc. that generate volume. Call options trading volume tied to the iShares Russell 2000 ETF IWM (which tracks small-cap companies in the Russell 2000 Index) reached 1.35 million contracts, the third-highest ever, according to Goldman. Activity in options contracts related to small-cap stock indexes has been increasing since late October.

Heavy call option buying has driven the S&P 500 put-call ratio to its lowest level in a year, according to Goldman Sachs Group. This suggests that investors were buying up bullish contracts but avoiding bearish ones due to the sustained rise in the stock market. Goldman analysts are calling Friday “the last big event of the year.”
A unique coincidence of circumstances

“Triple Witching Friday” or “Witch Friday” happens once a quarter. On this day, futures on stock indexes, as well as options linked to individual stocks, ETFs and indices, expire. Experts note that they are usually characterized by more intraday fluctuations and higher trading volume.

This time the S&P 500 and Nasdaq-100 will be rebalanced after the markets close on Friday. This is typically a routine event, but it came into the spotlight this quarter because funds were forced to rebalance over the summer to limit exposure to large-cap Nasdaq-100 stocks.

Earlier this month, Standard & Poor’s announced its rebalancing plans, which included reducing the weighting of shares of Apple Inc and Alphabet Inc. GOOG, -0.57% GOOGL, -0.48%. At the same time, Amazon’s share. com will be increased. Three companies, including Uber Inc, will also join the index, while three others will leave it.

Kochuba believes this Friday’s expiration could remove the final barrier holding stocks back to record highs for the rest of the year.

“After OpEx, markets will no longer be held back,” he noted. OptionMetrics’ Garrett DeSimone cautioned that investors shouldn’t put too much weight on options market activity and other technical factors.

“At the end of the day, it’s all about macroeconomics,” he told News.

 

 

options

The difference between binary and stock options

To begin with, it is worth understanding that there are real options, these are stock options that are traded on the derivatives market, for example, on the Moscow Exchange. There are also so-called binary options that have nothing to do with exchange trading. Accordingly, many of the fears of traders regarding the loss of money are associated with the concept of binary options, which can often be seen on the Internet. Let’s take a look at what is the difference between binary options and ordinary options, that is, stock options.
There are a number of markets on the Moscow Exchange, and the most famous of them are stock (stocks, bonds, shares), foreign exchange (conversion of different currencies) and futures (options and futures contracts).

An option is a contract for the purchase / sale of the underlying asset (the underlying asset for options are similar futures) until a certain date in the future on the terms specified in the specification of the option contract.

In fact, traders on the Moscow Exchange use these tools for various purposes:

• to insure positions – both in stocks and the portfolio as a whole, in futures;
• to make money on a non-linear market change — with the help of options, you can earn on a price not leaving the range or on a sharp impulse in any direction, as well as in many other situations;
• to make money on directional market movement – if the market is rising or falling.

 

There are a huge number of options for dealing with stock options, and each of them requires a different level of trader’s training. We advise beginners to first start studying stock options from the moment they buy their first share, since this tool allows you to insure, or, as stockbrokers say, “hedge” risks.

 

For example, if a futures on Sberbank shares (futures are the underlying assets for options) costs 14,750 rubles. When buying it, you do not know at what price you will close the deal (sell the futures). But by buying a put option (the right to sell a futures on Sberbank at 14,750 rubles for a month for 460 rubles), you insure the position in advance – if the futures price falls, you can sell it at the purchase price. But for the possession of such a right, we pay 460 rubles. And since the dynamics of the futures very often repeats the dynamics of the stock itself, it is possible to hedge both the stocks and even portfolios of securities with options.

 

In addition to the function of exchange insurance, options also perform another one – they allow you to earn on the movement of the asset price in a certain direction (up or down). So, if the value of the underlying asset is 14,588 rubles, you can buy a call option (opportunity to buy) at 14,500 strike for 473 rubles. For you to be able to earn, the asset must rise above 14,500 rubles by the value of the option before the expiration date. Everything by which the asset rises above 14,973 rubles will be a profit on the option. If the growth does not take place, then the maximum loss is the value of the option. Similarly, if we buy a put option for 385 rubles at a strike of 14,500, then in order to earn money, the price of the asset must decrease below the specified strike by the value of the option, that is, to 13,730 rubles. Anything the asset falls below will be a profit.

 

Options allow you to make money on non-linear price changes, but such option designs require more experience. Knowledgeable traders say that it is not worth allocating more than 10% of the portfolio for this kind of work. So, if the asset is worth 94,050 pp., then you can buy both a call option (for the right to buy) and a put option (for the right to sell) at 95,000 strike (the right to deal at a specified price) for a week for 990 and 1940 pp. respectively. In this case, in order to earn money, the asset must either rise above the 95000 price level by the maturity date of the options (expiration) by 2930, or fall below the specified value. Therefore, it is not so important in which direction the asset will go – it is important that the movement is powerful.

It turns out that working with stock options is very diverse and goes well with building a portfolio of securities, complementing it and helping to control risks.

Binary Options

The first trading in binary options took place in 2008 in the USA with the participation of CME and AMEX. This type of option involves receiving a strictly fixed profit if the condition (growth or decrease) above/below the specified level is met and a loss in the amount of the option value if the condition is not met before the option maturity date. “Trades” in this type of options soon began to organize various “kitchens” (companies that do not list transactions on the exchange, but make “bets” on the value with their clients). And soon the SEC began to prohibit trading in such instruments, since the transactions were not displayed anywhere, and the companies – “kitchens”, of course, did not have the necessary licenses to create such financial products. And these bans were carried out not only in the United States, but also in a number of countries, such as Canada, France and Israel.

On the one hand, the idea of binary options allows you to clearly control the possible profit and loss. On the other hand, it allows the organizers of the auction to calculate the cost of the option in such a way that it would be unprofitable to buy it in the long term due to profit limitation.

Trading binary options has nothing to do with real stock options. Not a single binary option is traded on the Moscow Exchange. Another significant difference between an option and a binary option is that when working with binary options, a trader is offered to trade only them, which entails not a risk of drawdown, but the risk of losing capital. If the condition is not met, the option is completely depreciated, and the very principle of using options to control risk and replenish the portfolio becomes violated, which is extremely unfavorable for the trader.

The difference between binary options and stock options is obvious. Options are a portfolio complementary tool that helps control risk and maximize returns. But in order to use options in this way, they must be real – stock options.