Traders Brace for Volatility as a Record $6.6 Trillion in Options Are Due to Expire in Friday’s ‘Triple Witching'

It’s “triple-witching” day again, and this Friday is shaping up to be a record-breaking event. Options connected to over $6 trillion worth of stocks, ETFs, and indexes are set to expire, marking what could be the largest expiration in history. According to data from Asym 500, the total value of expiring contracts is approximately $6.6 trillion, though some estimates place the figure as high as $7.7 trillion.

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The busiest period of the day is expected to occur at the market’s opening. Most options tied to the S&P 500 index will either be exercised or expire worthless at that time. Based on the $6.6 trillion estimate, this expiration would set a new record in terms of notional value, according to Rocky Fishman from Asym 500.

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Fishman also pointed out an interesting comparison: although the current event is historically significant, the notional value of options that expired in December 2023 was relatively larger when measured against the aggregate value of all U.S.-listed stocks at the time. In December, the total market capitalization was $48 trillion, but it has since surged to $62 trillion.

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Triple-witching events are always closely monitored by market participants, but this particular occurrence carries heightened significance due to recent market turbulence. On Wednesday, a sharp selloff triggered by concerns about the Federal Reserve’s monetary policy rattled investors. Fears that the central bank may be nearing the end of its rate-cutting cycle caused the Dow Jones Industrial Average to plunge over 1,100 points.

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This sentiment also spurred the largest single-day jump in the Cboe Volatility Index (VIX), commonly known as Wall Street’s fear gauge, since 2018. The VIX is heavily influenced by trading in S&P 500 options, which underscores the interconnectedness of these events.

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Adding to the potential for market swings is the release of the latest personal consumption expenditures (PCE) price index on Friday morning. This inflation measure could significantly impact investor sentiment if the numbers exceed expectations. Bret Kenwell, a U.S. investment analyst at eToro, emphasized the report’s importance, stating, “A hotter-than-expected PCE reading could intensify recent selling pressure, while a softer number might ease Wall Street’s reflation fears.”

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Leading up to Wednesday’s selloff, the options market was heavily skewed, with open interest in call options far exceeding that in puts. Brent Kochuba, founder of SpotGamma, noted that this imbalance has somewhat shifted in the past 24 hours, although call interest still remains dominant. He suggested that as bearish put options either expire or are rolled over, the resulting hedging flows from dealers might help stabilize the market and reduce volatility.

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However, Kochuba expressed caution, suggesting that Wednesday’s downturn might be a precursor to a more significant decline, potentially beginning in early 2025.

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Despite the recent volatility, U.S. stocks managed to recover modestly on Thursday. By the afternoon, the S&P 500 had risen 0.2% to 5,885, the Nasdaq Composite was up 0.2% to 19,440, and the Dow Jones Industrial Average had gained 136 points, or 0.3%, to reach 42,465.

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Triple-witching occurs quarterly when options tied to individual stocks, ETFs, and major indexes like the S&P 500 expire alongside futures contracts linked to equity indexes. These events often result in elevated trading volume and increased volatility, making them pivotal moments for traders and investors alike.

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This time, the stakes are even higher due to the confluence of a massive options expiration and heightened market sensitivity to macroeconomic factors. How the market navigates this significant event could set the tone for the weeks ahead, particularly as traders grapple with uncertainties surrounding Federal Reserve policy and broader economic conditions.

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