NVIDIA'S Rally Faces a New Test in Friday's Triple Witching Options Expiration

Nvidia Corp. shares are poised for significant volatility on Friday, driven by a surge in trading of contracts linked to the chip maker ahead of the historic June “triple witching” expiration.

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Recently, investor interest in Nvidia (NVDA, +3.51%) has reached nearly unprecedented levels, with open interest in Nvidia call options surpassing that of similar contracts for the S&P 500 (SPX) and a popular ETF tracking the large-cap index, according to SpotGamma data.

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The surge in interest is partly due to Nvidia’s 10-for-1 stock split last week and its increased weighting in the $71 billion Technology Select Sector SPDR ETF (XLK) due to a rebalancing on Friday. These factors have significantly boosted bullish bets on the stock. Typically, monthly options expirations result in higher trading volumes and increased market volatility.

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Over the past year, buying Nvidia calls has become a popular strategy because of the stock’s impressive performance. Nvidia shares have skyrocketed nearly 800% since the end of 2022, based on FactSet data.

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“It seems like it doesn’t take much to get people to buy calls on Nvidia,” said Danny Kirsch, head of options at Piper Sandler, in an interview with MarketWatch. “It’s a little bit like Pavlov’s dog. The more you do it, the more money you seem to be making. So why would you stop?”

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While Nvidia options expire weekly on Fridays, the volume and open interest tend to be higher during weeks when monthly options expire, according to SpotGamma data.

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In addition to Nvidia options, monthly and weekly contracts tied to other individual stocks, indexes, and ETFs will also expire on Friday, along with futures contracts tied to equity indexes like the S&P 500. The term “triple witching” refers to the quarterly occurrence when options tied to individual stocks, indexes, ETFs, and index futures all expire on the same day.

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Approximately one-third of outstanding Nvidia options are set to expire on Friday, according to SpotGamma data. This surge has pushed open interest in Nvidia options higher than the open interest in S&P 500 index options and those tied to the SPDR S&P 500 Trust ETF (SPY), a situation SpotGamma founder Brent Kochuba described as “very unusual.”

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This Friday’s quarterly options expiration is projected to be the largest ever based on the notional value of the options, which stands at $5.5 trillion, according to SpotGamma data. The notional value refers to the dollar amount of the underlying shares that the options control, with each option contract tied to 100 shares of stock, while index options typically settle in cash.

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Some speculate that the momentum propelling Nvidia’s shares could decrease after Friday’s options expiration, as the “gamma squeeze” that has driven shares higher may ease.

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In options trading, a “gamma squeeze” occurs when heavy call buying forces options market makers to buy more shares of the underlying stock to hedge their positions. This creates a feedback loop where hedging flows push shares higher, requiring even more hedging. “Gamma” measures how changes in the stock price impact the option contract’s price and potential return.

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However, Kirsch expressed skepticism. Although it might seem logical to expect Nvidia’s rally to cool off once options market makers offload some of their hedges, recent trends suggest otherwise.

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“There has been a ton of gamma, I agree — but there has always been a ton of gamma,” he said.

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The recent frenzy in Nvidia options trading has a notable precedent. In late 2021, trading in Tesla Inc. (TSLA) options reached a peak, helping to drive the electric-vehicle manufacturer’s stock to record highs in early November of that year.

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Nvidia shares ended Tuesday as the largest U.S. stock by market capitalization, valued at over $3.3 trillion, surpassing Microsoft Corp. (MSFT). This achievement drew comparisons to Cisco Systems Inc.’s brief period as the largest U.S. company during the dot-com bubble peak in March 2000.

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