Options Expiration Counterbalancing Federal Reserve’s Monetary Policy
An impending U.S. stock options expiration, projected to be the largest in history, could potentially mitigate market volatility and offset any turbulence caused by the Federal Reserve’s monetary policy announcement this week. With approximately $5 trillion in U.S. stock options set to expire on Friday, as reported by Asym500 MRA Institutional, a unit of derivatives strategy and execution firm Macro Risk Advisors, market analysts anticipate subdued stock swings during this expiration period. This development may help explain why equities have remained within a narrow trading range over the past few weeks, despite various other factors.
Equities Maintain a Steady Trajectory
The S&P 500 has demonstrated a significant 20.6% increase this year, resulting from a 12.5% rally since its October lows. More recently, the market has experienced diminished activity, with the benchmark index failing to surpass a 1% movement in any direction for 18 consecutive sessions. Such consistency in market performance hasn’t been witnessed since early August. Furthermore, the Cboe Volatility Index presently stands at 11.9, representing a near four-year low. By contrast, the index reached a high of 22.5 in March when a banking crisis sent shockwaves throughout the markets.
Options Dealers’ Impact on Stock Swings
The positioning of options dealers, who serve as intermediaries between derivative buyers and sellers, has been a key element in reducing stock swings. Exchange-traded funds (ETFs) that sell options to generate income have experienced a 100% growth this year, reaching a total value of approximately $60 billion, according to an analysis by Nomura. To manage the associated risks, options dealers, acting as counterparties to these ETFs’ options trades, must sell stock futures when equities rally and purchase futures when markets decline. Consequently, this balancing act helps maintain stock prices within a narrower trading range, say market insiders. Nomura strategist Charlie McElligott mentioned in a note on Tuesday that dealers’ positioning is highly likely to prevent any significant selloffs in the market until the end of the year.
Market Expectations and Expiration Impact
Although it is widely anticipated that the Federal Reserve will maintain unchanged interest rates, investors eagerly await any indications that policymakers may be leaning towards earlier rate cuts. This expectation has been a driving force behind the stock market’s rally throughout this quarter. The options expiration, however, is expected to alleviate the options market’s substantial influence on stock behavior, according to Brent Kochuba, founder of options analytic service SpotGamma. A similar scenario occurred two years ago when a comparably large options expiration curtailed volatility during part of the fourth quarter, only to be followed by a 3% surge in the final two weeks of the year after the December expiration.