"Another encounter with the three witching days in the US stock market! The market is facing a big test of $5.1 trillion."

Just as Wall Street traders begin to adjust to the Federal Reserve's interest rate cut, Friday's stock market "Triple Witching Day" may further stir up the market. According to derivatives analysis company Asym 500, around $5.1 trillion worth of index, stock, and ETF options are set to expire on Friday. "Triple Witching Day" refers to the day when options contracts for index, stock, and ETF options all expire on the same day, four times a year, typically on the third Friday of March, June, September, and December. As investors and traders need to adjust their positions before these contracts expire, the market tends to experience increased volatility and trading volume around "Triple Witching Day." This particular "Triple Witching Day" comes at a critical juncture for the market. The Federal Reserve announced a 50 basis point interest rate cut on Wednesday, the first cut in over four years and exceeding the 25 basis point cut that most economists had expected. At the same time, the S&P 500 index is less than 1% away from its all-time high, while the CBOE Volatility Index (VIX), which measures expected volatility in the S&P 500 index, remains higher than levels before the market sell-off at the end of July and early August, indicating that investors are still somewhat cautious. Matt Thompson, co-portfolio manager at Little Harbor Advisors, said, "Triple Witching Day may inject more volatility into the market, we just don't know in which direction." "Regardless of the market's views on the Fed's rate cut, the large number of options expiring on Friday will exacerbate those views." The expiration of these options coincides with the rebalancing of benchmark indices including the S&P 500, indicating a group of investors will engage in active trading around these positions, often resulting in the highest daily trading volume of the year. Before the market opens on Monday, Dell Technologies, Inc. Class C (DELL.US), Erie Indemnity Company Class A (ERIE.US), and Palantir (PLTR.US) will replace Etsy (ETSY.US), Bio-Rad Laboratories (BIO.US), and American Airlines Group Inc. (AAL.US) in the S&P 500 index. Tanvir Sandhu, Chief Global Derivatives Strategist at Bloomberg Intelligence, said that most of the open contracts for put and call options are concentrated around the 5500 point level of the S&P 500 index. In recent weeks, the index has mostly remained within a range of 200 points from this level, leading to speculation that the narrow trading range is a result of options activity, making the index a battleground between investors and market makers. Seasonal factors are also worth noting. The week following the September "Triple Witching Day" is typically marked by a significant decline in the stock market. According to data from the Stock Trader's Almanac, since 1990, on average, the S&P 500 index has declined by 1.1% in the week following the September "Triple Witching Day." During this period, there have only been four exceptions in 1998, 2001, 2010, and 2016, where the index saw gains during this time. Brent Kochuba, founder of options platform SpotGamma, said that the ratio of expiring call options to expiring put options is 4:1, which helped the stock market record its best five-day performance of the year last week. He noted that considering the higher number of call options on NVIDIA Corporation (NVDA.US) compared to other companies in the market, this should serve as a catalyst for further market gains. He added, "The recent rebound in the stock market has reduced the amount of bearish positions, alleviating the downward hedging pressure from the FOMC meeting and VIX expiration. The reduction in hedging pressure brings more potential for volatility in the coming week." This is why traders are closely watching the other side of options trading, the Wall Street traders who buy and sell stocks to maintain a neutral position in the market. Brent Kochuba said that if the S&P 500 index falls below 5600 points, these traders will begin to "short," selling stocks to maintain neutrality. As a large number of options are set to expire, the key question is whether investors will rebuild protective put options on concerns about economic growth, or chase the market rebound this month and buy call contracts as the S&P 500 index hovers near record highs. Matt Thompson said, "If the Fed's rate cut is too small or too late, investors may buy protective put options. If traders are forced to hedge, this could drag the market lower." "However, if the rate cut is well received by the market, it will support the stock market."