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- Volatility Looms as $5 Trillion in Options Expire
Volatility Looms as $5 Trillion in Options Expire
Exposure Status: Moderate Risk
OVERVIEW
Brace, Brace, Brace
After a strong day on Thursday, with the broad market hitting new highs thanks to the Federal Reserve cutting interest rates by 0.5% (which makes borrowing cheaper and encourages spending and investing), traders are now gearing up for what could be a wild Friday. Why? Because $5 trillion worth of options are set to expire today!
It’s also what’s called a “Triple Witching” day, which sounds mysterious but is just a term for when three types of contracts expire all at once:
Stock index futures – bets on where an index like the S&P 500 will be in the future.
Stock index options – similar to futures, but they offer flexibility on when and how to buy or sell.
Single-stock options – contracts tied to individual company stocks.
This happens four times a year and often causes a lot of volatility (when prices jump around more than usual) as traders rush to either close out, adjust, or roll over their contracts to future dates. With $5 trillion in options expiring, the stakes are high and the activity even higher.
In the past, triple witching days haven’t always been smooth for the market. Take a look at the last three events, for example. The S&P 500, tracked by the SPY, has dipped each time:
June 21, 2024: down 0.5%
March 15, 2024: down 1%
Dec. 15, 2023: down 0.6%
Even tech stocks, which are tracked by the QQQ, struggled during these periods. They were down 0.8% in June and 1.2% in March, though they managed a 0.5% gain in December 2023.
So, what does all of this mean for today’s session?
Well, yesterday was a pretty euphoric day in the market. We saw stocks rocket higher across the board, with a widespread rally that had pretty much everything moving up fast. It was one of those days where everyone was feeling good, and there was a lot of optimism driving prices higher. But as we got later into the session, we started to notice some selling pressure creeping in. Stocks that had been shooting up earlier began to dip as the session drew to a close, with some profit-taking and hesitation kicking in.
Now, looking at today, especially with $5 trillion in options expiring and the added chaos of triple witching (which, as we talked about, can really crank up market volatility), the smartest move is probably going to be patience. Days like this are known for some wild swings, and that can mean big price moves up or down, sometimes without much warning.
Rather than jumping in headfirst and being overly aggressive with your positions, it’s a good idea to wait and see how the market wants to move. It’s tempting to get caught up in the action, but with so much volatility on a day like this, rushing into trades could lead to getting whipsawed by unpredictable price swings and likely result in you taking unnecessary papercuts.
Let the market show its hand, and then decide where to take your next steps. If we dont see stocks move today, dont stress setups, come and go and there will always be another opportunity.
Nasdaq
QQQ VRVP Daily Chart
Yesterday, the Nasdaq saw a huge surge in volume, which wasn't too surprising given the overall mood. Optimism kicked in as investors felt more confident about the future of the stock market, especially in an environment of low interest rates.
The QQQ (which tracks the large tech stocks) had a strong rally, climbing up to $486. It pushed into what’s called a low volume pocket—basically an area where there’s less buying and selling activity, and prices can move more easily. But as the QQQ hit that level, we saw some profit-taking kick in. This selling pressure drove it back down into a high volume zone, an area with a lot of previous activity, where supply and demand tend to balance out. That’s where the QQQ is sitting now.
Another thing to note: we gapped up at the open yesterday, meaning the market opened higher than where it closed the day before. Historically, market gaps like this often get filled, meaning prices tend to come back down to where they left off before the gap. So there’s a chance we could see the QQQ drift lower to fill that gap from yesterday’s session. It might even trend lower towards the point of control (POC), which is a level where the most trading volume occurred and often acts as support.
This kind of move would make sense, especially considering today is triple witching day, which tends to stir up volatility. Historically, these days lean bearish as the market tends to struggle. So, keep an eye on whether the QQQ fills that gap and finds support at the POC, or if today’s action bucks the trend.
S&P Midcap 400
MDY VRVP Daily Chart
The midcaps (tracked by the MDY ETF) also had a similar gap up yesterday, but the difference here was that the MDY actually finished the day pretty strong. We saw it form a long tail, which means during the day it dropped lower, but then buyers stepped in aggressively, pushing the price back up. Despite closing with a red hammer candle, this is actually bullish and demonstrates strength.
There’s definitely a fair amount of uncertainty showing up on the charts right now. The last three candles look pretty messy, which isn’t too surprising given the events we’re dealing with in the market. It’s been a rollercoaster of rate cuts, high volatility, and major options expiring today. All of that combined doesn’t exactly build a ton of confidence in the immediate direction.
With today being triple witching, there’s a real chance we could see some pain in the market. However, the midcaps are looking a bit more promising compared to other areas and given how low rates tend to be helpful for the smaller businesses, we are generally bullish on the midcaps as a whole. Even though uncertainty is in the air, the price action in the MDY gives a glimmer of hope for buyers as we head into today’s session.
Russell 2000
IWM VRVP Daily Chart
The small caps are in a similar spot as the midcaps, which isn’t surprising since they also benefit a lot from low interest rate environments. Like the midcaps, the IWM ETF (which tracks small-cap stocks) also closed with a bullish hammer candle yesterday, signaling some real strength. This suggests that, despite any intraday dips, buyers stepped in aggressively to push prices back up.
Right now, the IWM is sitting just below a low-volume pocket at around $229, which is an area where prices can move quickly since there’s less buying and selling activity. However, we’re a bit extended from the rising 10-day EMA (Exponential Moving Average), which is like a short-term trend indicator. Being extended from it could mean we might see a pause to let the price catch up to the trendline. Still, the overall setup for the IWM looks strong.
There’s a much denser volume cluster between the POC (Point of Control) at $219 and the current trading level. These volume clusters represent areas with a lot of trading activity, which can act as resistance or support and are generally hard to break through. So, the choppiness we’ve been seeing lately makes sense given this resistance zone.
But despite the chop, small caps are still showing potential strength heading into the next few sessions and we are most bullish on them for the foreseeable future.
DAILY FOCUS
Let The Dust Settle: Control Your Emotions
Yesterday was a big euphoric day in the market, and now it’s time to cool down. The market needs to take a moment to catch its breath and figure out its next direction. With $5 trillion in options expiring today, we’re definitely going to see some volatility, whether we like it or not. While this could lead to bullish movement, it’s crucial to stay defensive—because, honestly, no one knows for sure what will happen!
If you’ve been playing your cards right, you should have some open exposure that’s been turning a profit. As trades come your way, keep managing them as they unfold. Just be careful not to stop yourself out for no good reason, and make sure to stick to your sell rules.
Today, it’s wise to be cautious with your entries. Given the heightened volatility, waiting for a clear trend before jumping in is a smart move. We’re in a moderately risk-on position, looking to add trades only if the best-case scenario plays out and we see a rally. For now, it’s better to stay defensive and focus on managing your open positions.
Stay calm, trust the process, and remember to think about the next 1,000 trades, not just the next one. Keep your long-term vision in mind!
WATCHLIST
The Standout Stocks
ASTS: AST SpaceMobile, Inc.
ASTS Daily Chart
ASTS is definitely setting up to be hard to ignore! The stock is currently undergoing a nice volatility contraction along its daily 10 and 20-EMA, which is a good sign.
Considering its previous rally was so strong and that it’s been one of the top momentum stocks recently, this setup for ASTS is a top priority.
We’ll be watching closely over the next few sessions to see how ASTS holds its range. A break above $30.60 on the 5-minute opening range high with high relative volume will trigger a long position for us.
QH: Quhuo Limited- American Depository Shares
QH Hourly Chart
This is a different kind of swing trade than what we usually discuss—this one focuses on a short-term momentum burst style of trading.
QH had a big move up on September 10th and has since been forming a narrow range along its hourly 50-EMA, getting progressively tighter in its contraction.
Stocks like these, which can rally so aggressively, aren’t suitable for longer holds. However, they can make impressive 100-200% moves in just a day or two, making them perfect candidates for these short momentum burst trades.
If we see QH rally on the hourly, we would enter and look to scale out profits very aggressively, as holding overnight can be risky.
This type of swing trade can be trickier due to how volatile the stocks are, so it’s best to avoid it if you’re new to the markets.
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This newsletter does not provide financial advice. It is intended solely for educational purposes and does not constitute investment advice or a recommendation to trade assets or make financial decisions. Please exercise caution and conduct your own research.
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