Seance Fiction

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What's going on?

A witching day on Friday saw several options and futures contracts expire, and investors were looking for a sign any sign of what might come in the great beyond.

What does this mean?

Four times a year, a slew of major derivative contracts on US stocks all expire at once. That leaves investors with a decision to make: buy and keep the related shares, or roll forward those contracts by buying ones with a later expiry date. All investors subsequent buying and selling on Friday, then, risked making the US stock market extra volatile. Only problem was, analysts couldnt tell whether all that extra activity would be a good thing or a bad thing

Why should I care?

For markets: There were big scores to settle.


Goldman Sachs estimated that there were about $2 trillion worth of options and futures contracts on US stocks expiring on Friday. Thats a lot, sure, but the proportion of contracts whose agreed-upon “strike prices” were within 10% of current prices was as small as itd been in the last 10 years. Thats important because an investor is more likely to exercise their option that is, the right to buy or sell at a given strike price and date if that strike price is close to the current price of the asset. So while there might be some volatility, it would be much more significant if a bigger proportion of those options strikes were closer to current prices.



For markets: It helps to see these things coming.


Most institutional investors will have been well aware of the potential for an uptick in volatility, but it mightve come as a surprise to retail investors. And while the big-hitters havent historically paid much attention to things that unsettle their smaller counterparts, they might want to do just that: retail investors now hold 35% of all US stocks and thanks to the recent surge in popularity of commission-free trading apps account for one-fifth of all stock trading.

Originally posted as part of the Finimize daily email.

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