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Investing.com -- Wall Street stocks may be on the brink of a correction due to disturbances in the options market, according to a note written by Goldman Sachs specialist Scott Rubner on Thursday. Approximately $2.7 trillion of U.S. stock market derivatives are set to expire on Friday, which, if left unexercised, could apply pressure on stock markets and provoke volatility.
These derivatives include bets on the S&P 500, as well as U.S. exchange-traded funds and individual stocks. Banks and intermediaries involved in these bets have over $9 billion of hedges against these trades. These positions have served to dampen volatility, supporting weakness and muting rallies.
Scott Rubner stated, ""Are we there yet?" - Yes, the flow dynamics change dramatically starting Monday. Lots of incoming questions this morning on market technicals. I was not planning on sending this today, but it is time for a thread. I am on the lookout for an equity market correction."
Rubner further detailed that Goldman Sachs Derivatives Research estimates that over $2.7 Trillion of notional options exposure will expire on February 21st, including $1.2 Trillion of SPX options and $615 Billion notional of single stock options.
He added that index dealers are long +$9.787 Billion of S&P 500 gamma at current spot, acting as a market buffer, supporting weakness and muting rallies. The trading team at GS estimates that 50% of this long gamma position rolls off, and the market will have the ability to move more freely next week.
Due to the long gamma position in the market, 10-day realized volatility is at 8.8%, marking the lowest 10-day stretch of the year. As a result of this lower realized volatility, vol control strategies have continued to add exposure.
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