After the Federal Reserve announced a hawkish rate cut, Wall Street is facing a new market test. This Friday (December 20), US stocks will experience the fourth "triple witching day" of 2024, expected to reach a record scale. According to the latest estimates by derivative analytics firm Asym 500, approximately $6.5 to $7.7 trillion worth of stock, index, and ETF options will expire on that day. Combined with the quarterly adjustment of the S&P 500 index, this "triple witching day" is seen as a catalyst for market volatility and trading volume.
What is "Triple Witching Day"?
"Triple Witching Day" refers to the day when stock options, stock index options, and stock index futures all expire simultaneously, occurring quarterly on the third Friday of March, June, September, and December. This day typically witnesses a surge in trading volume and price volatility as numerous investors adjust or reposition their holdings.
This "Triple Witching Day" coincides with the quarterly rebalancing of the S&P 500 index, requiring market participants to engage in extensive trading around changes in the benchmark index. The S&P 500 adjusts the weights of its constituent stocks each quarter, often leading to annual peak levels of trading volume on that day.
Impact of the Fed's Hawkish Rate Cut
Earlier this week, the Federal Reserve announced a 25 basis point rate cut but hinted at slowing future rate cuts. This signal of a "super hawkish rate cut" has put pressure on the market, as investors feel heightened concerns about uncertainty in future monetary policy. Market analysts indicate that the Fed's stance is reshaping investor expectations for asset pricing, especially in the context of still-uncontrolled inflation.
Market Risks and Trading Opportunities Coexist
While Wall Street is prepared for the volatility risks on "Triple Witching Day," the unprecedented scale of options expiring could bring even greater market fluctuations. The disappearance of a large number of contracts may cause sudden stock price swings, requiring traders to roll over or establish new positions in response. This phenomenon might lead to a notable increase in trading volume on that day, while also boosting short-term market volatility.
Additionally, the PCE index, the Federal Reserve's most watched inflation indicator, will be released on the same day. This data is crucial for monetary policy expectations, and if inflation rises more than expected, it could further dampen market sentiment and suppress hopes for further rate cuts.
Future Outlook
With the overlap of "Triple Witching Day" and inflation data release, short-term volatility risk in US stocks is expected to intensify. However, some analysts believe that due to the rise of short-term options trading and increasingly diverse institutional hedging methods, the impact of this "Triple Witching Day" might be less than anticipated. Derivatives experts point out that most of the open bearish contracts are out-of-the-money, limiting the direct impact on the market.
Nonetheless, investors need to closely monitor the day's trading dynamics and the performance of the PCE data to manage potential sharp fluctuations. In the context of heightened market risk, effective risk management and position adjustments are crucial to ensuring investment safety.
