Unprecedented S&P 500 Volatility Imminent Ahead of Major Options Expiration

The S&P 500 is set to see $1.8 trillion worth of options contracts expire on June 19.
The third-largest non-December options expiration date in history could fuel massive volatility in the market.
Rising trading activity among Robinhood traders and positive comments from Moderna CEO Stephane Bancel can also add to the volatility.

The S&P 500 Index may face a heightened level of volatility on June 19.

According to FT finance correspondent Robin Wigglesworth, $1.8 trillion worth of S&P 500 options are expiring in the next 48 hours.

The analyst said:

Massive amount of options expiring on Friday. $1.8tln of SPX options – making it the third-largest non-December expiration on record -in addition to $230bln of SPY options and $250bln of options on SPX and SPX E-mini futures.

A massive options expiration day could fuel intense movements in the stock market because options contracts allow investors to buy or sell stocks at a specific price and date.

June 19 could be the third-biggest non-December S&P 500 options expiration date | Source: Robin Wigglesworth

Why This Particular Options Expiration Date is Critical

When an options contract is purchased, a trader is essentially buying the right to buy or sell the asset at an agreed-upon price.

For example, let’s say a trader previously bought a $100 June call option for a stock, and it is currently trading at $120. Before the options contract expires, the trader has the right to purchase the stock at $100. But the trader can also choose not to buy it.

On Friday, up to $2.2 trillion worth of options may expire. It means a large number of traders will be looking to buy or sell stocks based on call or put options, which will likely cause a massive spike in daily volume.

The S&P 500 has already been volatile in recent weeks, especially following the June 11 crash. The index dropped from 3,190 to 3,002 within 24 hours as major stocks recorded a double-digit plunge.

Uncertainty in the U.S. stock market can also lead to a more volatile options expiration date.

Data show that options traders are generally expecting large movements in the S&P 500 in the next 48 hours.

Robin Wigglesworth said there had been an upsurge of new options contracts in the past day. The newly-activated options contracts likely come from traders that anticipate newfound volatility by week’s end.

Analyst notes a sharp spike in options. | Source: Twitter

Two Variables That May Add to S&P 500 Volatility

Other than the expiration of options contracts, two factors can impact the S&P 500 in the near term: progress of Moderna’s vaccine and rising trading activity on Robinhood.

In recent weeks, retail demand for stocks has risen to a point where Wall Street is taking notice.

Tobias Levkovich, chief U.S. equity strategist at Citi, said:

We have heard anecdotally about younger individuals with less market experience viewing the March plunge as a unique time to start portfolios and often crowding into the tech arena.

Based on the high level of retail trading activity, Bancel’s positive speculation about a vaccine could further spur investors’ appetite in the short term.