As we previewed yesterday, today we get a rather sizable $2 trillion option expiration (over half of this is SPX ($1.04tr) and $350bn each of single stock + ETF; the largest strike of SPX open interest is 3700 with 85,000 options expiring at 9:30:00 (35bn notional // 320mm premium). As Goldman’s Vishal Vivek notes today, over the past year, options trading activity has shifted from single stocks to index options (not to mention the explosion in Zero Days to Expiration avalanche discussed yesterday by Charlie McElligott)…
… particularly as individual investors have increasingly focused on buying index calls. This has driven index options volumes to record levels, while driving SPX one-month normalized put-call skew to the 5th percentile relative to the past 28 years, potentially exacerbating daily realized volatility.
Ok, but how is this information relevant to trading today?
Well, at major opex days, options traders track situations where a large amount of open interest is set to expire. In situations where there is a significant amount of expiring open interest in at-the-money strikes (strike prices at or very near the current stock price), delta-hedging activity can impact the underlying stock’s trading that day. If market makers or other options traders who delta-hedge their positions are net long ATM options, expiration-related flow could have the effect of dampening stock price movements, causing the stock price to settle near the strike with large open interest. This situation is often referred to as a “pin” and can be an ideal situation for a large investor trying to enter/exit a stock position. Alternatively, if delta-hedgers are net short ATM options (have a “negative gamma” position), their hedging activity could exacerbate stock price moves.
As noted earlier, some 85,000 SPX options expired at 9:30:00, “unclenching” the market and reducing gamma substantially, meaning there is far less impetus to pin the S&P around 3,700.
What about at the individual stock level? According to Goldman, expiration-related trades may cause volatility and trading activity to pick up for stocks with a significant amount of ATM open interest.
Below we have identified several possible stocks with large open interest, and compare to the average daily volume of the underlying stocks. Large market cap names include OLED, AMGN, GIS and SLB. Expiration-related activity is likely to have more of an impact if the open interest represents a significant percentage of the stock’s volume
