Daily Brief - Volatility Awakens

TLDR: It's time for some action as Friday’s US options expiration might finally shake things up for traders craving a bit of volatility.

The so-called 'triple-witching' day will see a whopping $5.5 trillion worth of options tied to indexes, stocks, and ETFs expire. As these contracts fall off, traders will adjust their positions, potentially causing a spike in trading volume and swinging individual holdings.

This quarterly expiration happens as implied volatility on S&P 500 options sits near its lowest level since before the pandemic. The S&P 500’s recent performance has been buoyed by Nvidia Corp. and other AI-linked stocks. Adding to the excitement, the expiration coincides with the S&P Dow Jones Indices' rebalancing act, which always stirs the pot a bit.

Once the dust settles, the market might see some turbulence. This time, the expiring value tied to calls is 11 times greater than that of puts, a significant jump from last quarter’s 5:1 ratio. This signals a growing demand for upside exposure and might lead to some minor dips in highly-traded benchmarks and stocks.

While the average investor might not feel the impact, for dealers, large expiries mean tough choices and could lead to significant market gyrations, particularly in the final hour of trading — the aptly named ‘triple-witching hour.’

Adding an extra twist, Nvidia’s contracts are set to play a significant role in this expiration, second only to the S&P 500, indicating the chipmaker’s significant influence on the broader market.

Scenario Spotlight: If we see a 5% jump in the VIX today

When the VIX has previously surged by 15% in a month while being below 16, historical data suggests that NVIDIA could face potential downside in the following month.

Market Movers: Historical Winners

The list below shows the historically best performing stocks in the 1 month following a 15% rally in the VIX:

1. Enphase Energy - 37.44%
2. Match Group - 15.38%
3. Etsy - 14.18%
4. ServiceNow - 11.43%
5. Marathon Oil - 10.75%
6. SolarEdge Technologies - 10.13%
7. Under Armour A - 9.73%
8. Valero - 9.20%
9. CATALENT - 8.45%
10. Take Two - 7.51%

Market Movers: Historical Losers

The list below shows the historically worst performing stocks in the 1 month following a 15% rally in the VIX:

1. Qorvo - -10.25%
2. DR Horton - -9.32%
3. Lennar - -8.98%
4. Western Digital - -8.79%
5. PulteGroup - -7.29%
6. Seagate - -6.90%
7. Intercontinental Exchange - -6.74%
8. Ulta Beauty - -6.62%
9. Penn National Gaming - -6.43%
10. Masco - -5.57%