The Federal Reserve's interest rate cut and the impending expiration of $5 trillion in options, yet the market bets that volatility is unlikely to surge

The Zhitong Finance APP noted that as the Federal Reserve meeting and the $5 trillion quarterly triple witching event loom over the stock market, volatility traders are closely monitoring the upcoming employment data.

The market generally expects the Federal Reserve to cut interest rates on Wednesday, while quarterly options for stocks, exchange-traded funds (ETFs), and indices will expire on Friday—some analysts believe this move will clear market maker positions. Although these events are usually attractive to traders betting on increased market volatility, this time they expect volatility to not return immediately.

As a 25 basis point rate cut has been fully priced in by the market, investors will closely watch Federal Reserve Chairman Jerome Powell's dovish or hawkish remarks at the press conference. More importantly, the market's focus will shift to employment data for clues on the pace and depth of central bank rate cuts.

Price volatility of the S&P 500 index on Federal Reserve meeting day

According to Citigroup data, the options market pricing indicates an expected volatility of 0.78% on the day the U.S. non-farm payroll report is released on October 3, and an expected volatility of 0.72% on the day of the Federal Reserve's interest rate decision (Wednesday).

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, stated: "If next month's non-farm data shows a negative 50,000, market volatility will surely increase." He emphasized that negative employment data may be needed to drive up market volatility, "I think this is a necessary condition; the unemployment rate may need to rise to around 4.5%."

After weekly unemployment claims in the U.S. surged to a nearly four-year high, further deterioration in employment data could accelerate the pace of rate cuts. While this may boost the market in the short term, it will increase the risk of sell-offs.

Garrett DeSimone, head of quantitative research at OptionMetrics, pointed out: "History shows that especially during emergency rate cuts, intraday market returns are usually positive, but mid-term returns often turn negative, as the market interprets rate cuts as a signal of sharp economic deterioration."

Intraday volatility of the S&P 500 index

Friday's triple witching day appears somewhat subdued, with market observers downplaying its impact. A review of 35 years of data shows that the S&P 500 index's intraday volatility during expiration week is often slightly higher than the following week, challenging the commonly touted "free volatility" theory The theory suggests that when market makers close their options positions, market volatility becomes freer—because they no longer balance their positions through "selling on the rise/buying on the dip," which suppresses volatility. However, DeSimone noted that this phenomenon often manifests during periods of higher volatility.

"Quarterly options expiration is increasingly becoming a non-event factor, especially during periods of lower volatility," DeSimone emphasized, "so don't expect significant price fluctuations on the Monday after expiration."