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Wall Street’s $5.5 Trillion Triple-Witching to Test Market Calm

(Bloomberg) -- Friday’s US options expiration may provide volatility-starved traders with some short-term market swings.

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The so-called ‘triple-witching’ will see some $5.5 trillion worth of options tied to indexes, stocks, and exchange-traded funds fall off the board, according to an estimate from options platform SpotGamma. As the contracts disappear, investors will adjust their positions, adding a burst of volume capable of swinging individual holdings.


This quarter’s expiration comes as implied volatility on S&P 500 options is holding near the lowest level since before the coronavirus pandemic, with the US benchmark index riding the surge in shares of Nvidia Corp. and other artificial intelligence-linked companies. The expiration coincides with index rebalancing, when S&P Dow Jones Indices shuffles company weightings and ETFs that track its gauges make similar adjustments.

After the positions roll off, taking with it an estimated $5 billion in so-called “long gamma,” the market could be set for a touch of turbulence, according to Scott Rubner, global markets division managing director and tactical specialist at Goldman Sachs Group Inc.

Friday’s confluence of events as well as next Friday’s session, which will see the Russell indexes reshuffle, “will be explosive trading sessions as we have seen classic asset managers more actively take advantage of excess volumes and tactically trade positions around,” Rubner wrote.

This time around, the expiring value tied to calls is some 11 times greater than the notional value of puts — according to Brent Kochuba, SpotGamma’s founder. That’s a stretch from last quarter when the ratio was closer to 5:1. The widening gap signals growing demand for upside exposure, alongside shriveling desire for puts. It might also prime highly-traded benchmarks and stocks for minor dips lower on Friday and into early next week, he said.

“The options complex is too stretched to the upside,” said Kochuba. “Things will start to consolidate, and the market will get a little more volatile.”

While mom-and-pop investors may hardly notice the events, dealers certainly will. For them, large expiries mean tough choices: roll or offset positions, or close them out entirely. The twists and turns can spur added gyrations, particularly in the final hour of trading, known — fittingly — as the ‘triple-witching hour.’

Estimates regarding the exact size of the expiry vary based on how analysts calculate it; Citigroup, for example, published a smaller figure of $4.8 trillion. Regardless of the exact numbers, prognosticators say the amount popping off Friday should be roughly in line with that of the last two quarterly expiries in March and December.

Market participants caution that the impacts of quarterly option expiries tend to be overstated. Yet, even minor gyrations in stocks could diverge from the extreme lull of late. While the notional value of expiring options may be growing, so is the overall market, said Rocky Fishman, founder of derivatives analytical firm Asym 500.

“All numbers get bigger over time as the economy gets bigger and the value of the equity market gets bigger,” Fishman said. “But measured as a % of the size of the equity market, I’m pretty sure we’re well behind last December.”

This quarter, outside of a brief pop in April, the Cboe Volatility Index, or VIX, has held near the lowest since early 2020. The growing popularity of option-selling ETFs, as well as smaller daily swings as indexes ground higher, have discouraged traders from buying protection against a selloff. The S&P 500 is on track for about a 4% advance in the second quarter for its third consecutive period of gains.

Nvidia will also play an added role this time around, Kochuba said. The value of contracts tied to Nvidia set to expire is the second-largest of any underlying asset, lagging only the S&P 500. That tops the SPDR S&P 500 ETF Trust (ticker SPY) as well as the Nasdaq 100 and the most popular ETF that tracks it — flipping the patterns of previous expiries in a sign of the chipmaker’s outsized influence in the broader market.

--With assistance from Natalia Kniazhevich.

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