A derivatives strategist at Goldman Sachs Group predicts that Friday could be a historic day for the U.S. options market. Trading in U.S. stock options, particularly zero day to expiration options, has been booming. The latest figures from John Marshall, head of derivatives research at Goldman Sachs, show that contracts attached to $3.4 trillion worth of U.S. stocks, exchange-traded funds, and equity indexes such as the S&P 500 are set to expire on Friday during September's expiry for monthly and quarterly options.

The upcoming expiry is shaping up to be the largest September expiry ever recorded, raising the possibility of increased market volatility to end the week. Goldman Sachs provided a breakdown of the notional value expected to expire. It reveals that nearly $2 trillion worth of S&P 500 index options are due to expire Friday morning, while single-stock options with a notional value of $555 billion will expire later in the day, along with numerous other contracts.

In options-market terminology, notional value refers to the value of the underlying securities or indexes controlled by the option. Generally, index options are settled in cash, while options on single stocks and ETFs are settled in shares.

Given the recent fluctuations in U.S. stocks, a significant portion of the options expiring on Friday are near being "in the money." This could potentially add to market volatility. Wall Street believes that it is common for choppy markets to coincide with quarterly options expiry days.

Equity Market Predictions for September Expiration

The upcoming September expiration is expected to be one of the largest on record, with a significant amount of open interest in options near the current spot level. Despite relatively subdued stock-market volatility, there has been an increase in trading volume for short-dated options with less than 24 hours until expiration. These options now account for 49% of activity in S&P 500 index options.

The surge in open interest leading up to September's expiration can be attributed to the growth in trading of index and ETF-linked options. Analysts warn of potential volatility, as historical data shows that the S&P 500 has finished lower on 10 out of the past 11 September expiration days, with a median return of -0.5%. Additionally, the week after September expiration tends to be rocky for stocks, making it historically the worst month for the S&P 500's performance.

As Friday approaches, an unusually large amount of exposure on options dealers' books is set to evaporate, potentially leading to more volatility. Traders will likely open new positions to replace expiring options. It is important to note that large quarterly option expiration events often correspond with near-term market weakness, according to analysts.

In summary, the equity market is bracing for September expiration, which is expected to be among the largest on record. Options near the current spot level have generated a high level of interest, despite low stock-market volatility. Traders should be prepared for potential volatility and anticipate the possibility of new positions being opened to replace expiring options.

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