Stocks could be extra volatile to end the week

Stock Market

Traders work on the floor of the New York Stock Exchange (NYSE) on March 09, 2020 in New York City.

Spencer Platt | Getty Images

For a market rocked by big volatile moves lower, Friday’s expiration of stock futures and options could add even more wild swings.

But the quadruple witching expiration, as it is called, could also lead to a less choppy market and possibly even a positive week ahead, according to Marko Kolanovic, global quantitative and derivatives strategist at JPMorgan. Quadruple witching is the quarter-end expiration when options and futures on index and individual stocks expire simultaneously.

The expiration follows a series of big swings in the S&P 500 and a jump to record highs in the VIX, the CBOE’s Volatility Index. According to Dow Jones, the S&P rose or fell at least 4% in eight straight sessions in March, the longest stretch of such big moves ever.

The VIX, which is based on put and call options on the S&P, was at 72 Thursday, off its high of 85.5. The S&P 500 closed half a percent higher Thursday at 2,409.

“It has been a historic time — recent equity moves by many metrics have not been seen since 1929,” wrote Kolanovic, JPMorgan’s top quant.

An options trading strategy known as gamma hedging, levered exchange traded funds and other instruments, as well as systematic flows, have contributed to huge swings of 10% in both directions and pushed the VIX to record highs, he noted.

He added that about a third of short gamma will expire Friday. “This should reduce the chop and volatility going forward. Also given the weekly market seasonality, post expiry week reversion should be a net positive for the market,” he wrote.

Another positive for stocks could be the month-end rebalancing over the next 10 days. The outperformance of bonds over stocks means that portfolio managers will have to rebalance their holdings by buying stocks ahead of month-end.

‘”The stark underperformance of equities vs. bonds [month to date] leaves fixed-weight asset allocation portfolios about [about] 4% underweight equities, which suggests they are likely to do a large rotation out of bonds and into equities to rebalance back to target weights,” he noted.

Kolanovic said the rebalancing could result in a 4% outperformance of stocks during the last week of the month. He said the impact could be even larger due in part to low liquidity.

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