It’s “triple-witching” time again, and Friday’s expiration promises to be the biggest ever, with options tied to more than $6 trillion in stocks, exchange-traded funds and indexes set to expire.
Figures provided by Asym 500 showed $6.6 trillion set to expire, with others putting the notional value even higher, at $7.7 trillion.
As usual, the biggest wave of activity is expected when the market opens, as most of the index options tied to the S&P 500 will either be exercised or will expire worthless at that time.
Based on the $6.6 trillion figure, Friday’s quarterly expiration would be the biggest ever based on notional value, according to Asym 500’s Rocky Fishman.
He added, however, that the notional value of options that expired last December was actually larger relative to the combined value of all U.S.-listed stocks. At that time, the aggregate capitalization of the U.S. market stood at $48 trillion. It has since climbed to $62 trillion.
The quarterly event is always closely watched by traders. But the stakes are especially high this time, following Wednesday’s Federal Reserve-inspired selloff.
Concerns that the Federal Reserve might be nearing the end of its rate-cutting cycle caused the Dow Jones Industrial Average DJIA to fall by more than 1,100 points on Wednesday.
Those concerns also inspired the biggest one-day spike in the Cboe Volatility Index VIX, Wall Street’s so-called fear gauge, since 2018. The level of the index is influenced by trading in option contracts tied to the S&P 500 SPX.
The release of the latest reading from the personal consumption expenditures price index, due out Friday morning, could also help inspire volatility if it comes in hotter than investors are expecting.
“Friday’s PCE report just got a lot more interesting. A hot number could add to the recent selling pressure, while a lower-than-expected print could calm some of the recent reflation fears Wall Street seems to have,” said Bret Kenwell, U.S. investment analyst at eToro.
Before Wednesday’s selloff, Friday’s expiration was extremely lopsided, with open interest in calls outnumbering puts outstanding by a wide margin, according to Brent Kochuba, founder of SpotGamma.
That has shifted somewhat over the past 24 hours, although open interest in calls was still higher than puts, Kochuba said.
As these bearish puts expire, or are rolled over, they could help stabilize the market, Kochuba said. That is because hedging flows from dealers would likely help dampen volatility, rather than contribute to it.
Still, Kochuba said he is more worried that Wednesday’s selloff could be an “initial tremor” preceding a more painful downturn starting sometime in early 2025.
U.S. stocks rebounded on Thursday, with the S&P 500 SPX up 0.2% at 5,885 in afternoon trading, while the Nasdaq Composite COMP was up 0.2% at 19,440 and the Dow Jones Industrial Average DJIA was up 136 points, or 0.3%, at 42,465.
Once a quarter, options contracts tied to individual stocks and ETFs, along with indexes like the S&P 500, expire alongside futures contracts tied to major equity indexes. Derivatives-market experts call this “triple witching,” because days when large numbers of derivatives contracts expire are typically associated with higher trading volume and volatility.