Wall Street on Edge: “Fear Gauge” at Six-Month High as Massive Stock Options Expiry Looms

Wall Street is currently experiencing elevated levels of market apprehension, marked by the “fear gauge” reaching a six-month high just as a significant amount of stock options tied to approximately $2.5 trillion in market value are set to expire.

This convergence is causing traders to be on high alert for potential volatility shortly.

According to Rocky Fishman, the founder of Asym50, a substantial amount of these expiring options, amounting to $1.7 trillion, are linked to the S&P 500, either through futures contracts, the SPDR S&P 500 Trust ETF (SPY), or cash-settled contracts that track the index.

When many options expire, it often leads to increased trading activity on the various U.S. options exchanges, occasionally spilling over into broader market fluctuations and causing intraday volatility.


However, what makes this expiration particularly noteworthy is the recent surge in Wall Street’s fear gauge, the Cboe Volatility Index (VIX), often called the “fear gauge.” The VIX measures market volatility and investor sentiment, and its climb has drawn added attention to Friday’s options expiration, even though it’s not a “triple witching” day when more types of options contracts expire.

The VIX closed above 21, its highest level since March, surpassing its long-term average of 19.6; this is the first time in 101 trading sessions that the VIX has closed above 20, ending the longest such stretch since 2018. Some on Wall Street believe that a rising VIX may signal more market turbulence shortly.

Conversely, a higher VIX enhances the value of S&P 500-linked options, benefiting option-selling strategies that have become increasingly popular. Traders have been keen on strategies like selling options to short volatility, which have recently gained popularity. These strategies have seen a resurgence in 2023, offering opportunities for traders to benefit from the richer option premiums driven by the higher VIX.

In this context, strategies like those employed by the JPMorgan Equity Premium Income (JEPI) have garnered substantial inflows. JEPI’s approach involves selling covered call options to generate additional returns, and it has attracted $16.2 billion in inflows over the past year, underscoring the growing appeal of option-selling strategies.

Furthermore, traders are keeping a close eye on rising Treasury yields, particularly as the 10-year Treasury yield approached 5%, hitting fresh 16-year highs. This yield increase has caused some unease in the market, coinciding with a 0.9% decline in the S&P 500’s closing value, underlining the potential influence of rising interest rates on stock performance.


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