This Friday, Eastern Time, the US stock market will usher in another "three magic days", with over $6 trillion worth of stocks, ETFs, and index related options about to expire. This is expected to become the largest "three magic days" in history.
After the Federal Reserve's hawkish interest rate cuts this week, the US stock market has just experienced a significant sell-off. And this Friday evening, the United States will also release heavyweight PCE data. The arrival of the 'Three Witch Days' during this critical period is expected to trigger significant market fluctuations.
The US stock market will usher in "three witch days"
Every quarter, option contracts linked to individual stocks, ETFs, and indices such as the S&P 500 expire along with futures contracts linked to major stock indices. Derivatives market experts refer to this as the "three magic days" because the expiration dates of a large number of derivative contracts are often accompanied by higher trading volume and volatility.
According to data provided by Asym 500, there are $6.6 trillion worth of stocks, ETFs, and index related options about to expire, while others believe that the expiration size may be even higher, reaching $7.7 trillion.
Like the past 'three witch days', the US stock market is expected to have the most active wave of trading when it opens on Friday, as most index options linked to the S&P 500 index will either be exercised or expire at that time.
According to Rocky Fishman of Asym 500, calculated at a nominal value of $6.6 trillion, this Friday's quarterly maturity scale will be the largest in history.
The US stock market is currently in a high-risk period
The 'Three Witch Days' incident has always been closely monitored by traders. But the risk of this "three witch days" is particularly high, as the Federal Reserve's "hawkish interest rate cuts" this week have just triggered a round of stock market sell-off.
Due to concerns that the Federal Reserve may soon end its interest rate cut cycle, the Dow Jones Industrial Average fell more than 1100 points on Wednesday and barely rose on Thursday, ending its ten day losing streak. Meanwhile, this concern also triggered the largest single day increase in the Chicago Board Options Exchange Volatility Index on Wednesday,
In addition, to make matters worse, on Friday morning Eastern Time (9:30 PM Beijing Time), the United States will also release the latest Personal Consumption Expenditures (PCE) data. If the index exceeds investors' expectations, it may also help trigger market volatility.
The personal consumption expenditure report on Friday has made the situation more interesting. If the data is overheated, it may increase recent selling pressure, while if the data is lower than expected, it may ease Wall Street's recent concerns about inflationary pressures, "said Bret Kenwell, an investment analyst at eToro in the United States.
SpottGamma founder Brent Kochuba stated that the expiration dates on Friday were extremely imbalanced before the US stock sell-off on Wednesday: the number of open contracts for call options far exceeded that of put options.
However, after experiencing the sell-off triggered by the Federal Reserve, Kochuba stated that the situation has changed in the past 24 hours, but the number of open contracts for call options is still higher than for put options.
Kochuba stated that as these put options expire or extend, they may help stabilize the market, as hedge funds from traders may help suppress volatility rather than exacerbate it.
However, Kochuba expressed that he is more concerned that Wednesday's sell-off may only be a "preliminary shock" before the more painful downturn that began in early 2025.