Against the backdrop of the Federal Reserve's hawkish rate cut this December, which has significantly impacted global assets, the U.S. stock market is about to witness its fourth "Triple Witching Day" of 2024. It is estimated that on this Friday (December 20), approximately $6.6 trillion to $7.7 trillion worth of stocks, ETFs, and index-related options will expire, potentially setting a historic high for "Triple Witching Day."
"Triple Witching Day" refers to the quarterly expiration of stock, ETF, and index options, generally occurring on the third Friday of March, June, September, and December each year. This day often sees significant market fluctuations due to position adjustments. This particular "Triple Witching Day" has garnered considerable attention, especially against the backdrop of the Federal Reserve signaling a hawkish stance and heightened market risk aversion.
Federal Reserve's Hawkish Rate Cut Shocks the Market
At its December policy meeting, the Federal Reserve cut rates by 25 basis points as expected, but policymakers lowered the projection for rate cuts in 2025 from four to two, simultaneously indicating a slower pace of cuts. Fed Chair Jerome Powell made it clear that the U.S. is nearing a new phase of the easing cycle, indicating that future monetary policy will be more cautious.
This policy visibly jolted the market. On the day of the rate cut, the Dow Jones Industrial Average plummeted over a thousand points, marking the longest consecutive decline since 1974, and the S&P 500 fell nearly 3%, the biggest drop on a rate cut day since 2001. Additionally, the VIX fear index surged to 24.09, having reached a high of 28 the previous day, the largest single-day increase since 2018. The Cboe Volatility Index reflects investors' expectations for future 30-day volatility in the S&P 500, with its rise typically associated with increased market risk.
PCE Data May Be a Critical Variable
The volatility risk this Friday is not only from the expiring options on "Triple Witching Day" but also because the closely watched inflation measure by the Federal Reserve, the PCE Index, will be released. If the PCE data exceeds expectations, the anticipation for future rate cuts may diminish further, impacting U.S. stock performance and intensifying volatility.
Coexisting Risks and Mitigation Factors
Although this "Triple Witching Day" is unprecedented in scale, some analysts believe its "dramatic" impact might be mitigated. Derivatives experts note that with the widespread adoption of short-term options trading, investors can hedge risks more flexibly, thereby reducing the impact of any single "Triple Witching Day" on the market. Moreover, due to the recent strong performance of the S&P 500, most open put contracts are already out of the money, limiting their impact on the market.
Nonetheless, the market must remain vigilant about potential volatility risks. Analysts advise investors to closely monitor Friday's option expiration volume, PCE data performance, and changes in market sentiment, especially as the Federal Reserve's policy gradually tightens and in the context of a complex and volatile macroeconomic environment, where market risk management becomes particularly crucial.
Looking Ahead
With the dual pressures of "Triple Witching Day" and PCE data, U.S. stocks may face considerable volatility in the short term. However, in the long run, market performance will still be determined by multiple factors, including macroeconomic indicators, policy expectations, and global capital flows. Investors must remain vigilant and adjust investment strategies based on market dynamics to cope with potential uncertainties.
