Today, trillions of dollars worth of stock options will expire unless the holders choose to roll them forward to a future expiration date. This has implications that could spill over into the stock market. With $2 trillion in stock options on the line, financial-market volatility could surge very soon.
Here’s the breakdown. Options traders know that weekly options expire every Friday, and monthly options expire on the third Friday of every month. Today is that day for the month of August.
Sure, it’s an event that takes place each and every month, but the stakes are raised this time around. It’s estimated that roughly $2 trillion of options are scheduled to expire at the end of today’s options trading session. This, reportedly, includes $975 billion worth of options contracts linked to the S&P 500. It also includes $430 billion worth of options representing individual stocks.
Now, you might think that this event is limited to the world of options trading. However, even if you exclusively invest in stocks, today’s options expiration event could significantly impact your holdings.
Why Are Stock Options So Important Now?
As you’ve probably noticed, the S&P 500 and other major stock-market indices corrected downward through June. Then, starting in mid-June, they rallied sharply, even while the Federal Reserve is still very likely to continue slowing down the economy through interest-rate raises.
The Fed isn’t doing this to be sadistic (I hope), but only to tamp down inflation. Nonetheless, most likely, some retail traders recently purchased call options as a wager that the Fed will soon stop raising interest rates.
Call-option buying can boost the financial markets generally. If around $2 trillion of these call options are about to expire, though, then this pillar of market support won’t be there anymore.
Granted, it’s possible that some of these call-option holders will roll them forward, meaning sell their call options prior to expiration and purchase new call options that expire further out in time. However, this would require more capital, as well as a willingness to take on some risk.
Certainly, at least some of these call options will expire today without being rolled forward in time. Therefore, some stock investors may consider various ways to protect their portfolios, as market volatility may be right around the corner.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
