A $4.5 trillion triple-witching gives investors yet another test

A big chunk of these contracts is set to expire essentially worthless, prompting some market watchers to be skeptical that the event will lead to outsized moves caused by dealers trying to hedge positions

US stocks’ rebound off of last week’s lows will face a new test on Friday, when a pile of options contracts are set to expire in a quarterly event that often stoked volatility in the past.

The so-called “triple-witching” will see about $4.5 trillion of contracts tied to stocks, indexes and exchange-traded funds mature, estimates compiled by Citigroup Inc. show.

A big chunk of these contracts is set to expire essentially worthless, prompting some market watchers to be skeptical that the event will lead to outsized moves caused by dealers trying to hedge positions. Still, the event was in the past known for causing sudden price moves as contracts disappear and traders roll over their existing positions.

To IUR Capital’s Gareth Ryan, the day before a big contract expiry can be as active as the OpEx session itself.

“While a lot of volume could be done on listed products on the options expiry day itself, Thursday could also see a lot of activity around roll-outs, roll-downs and position closing, particularly on short options which may not need to be held to expiry day,” said Ryan.

The last ‘triple witching’ event on December 20 came days after the Cboe VIX Index spiked above 28 as hawkish projections from the Federal Reserve sparked the biggest rout in the benchmark equity gauge since early August.

The mood was calmer on Wednesday, when the S&P 500 jumped 1.1% as Powell said there’s no reason to change the current path of monetary policy, easing concerns about recession and inflation. Anxiety about the impact of President Donald Trump’s trade policies on the economy pushed the S&P 500 into a correction last week.

The quarterly OpEx event will likely send volumes flying as traders will unwind their wagers while dealers will roll any outstanding VIX futures positions to the next monthly expiry. Whether that will morph into wider stock-market swings remains to be seen.

To Citi equity trading strategist Vishal Vivek, Friday’s triple-witching is “less significant” relative to past events, based on lower than historical open interest outstanding, and relatively neutral dealer positioning.

“Dealers have been prepared for that forever,” said Kevin Darby, vice president of execution technologies at CQG, a financial software provider. “It’s the stuff they love to do: they basically just take edge, they hedge it out in a further month and let the gamblers gamble.”

Friday’s triple-witching is coming less than two weeks before the expiration of a huge options position at the end of the month. The JPMorgan Hedged Equity Fund’s (JHEQX) — which uses puts to shield against drops in the index — holds a long position in S&P 500 put options at 5,565 as part of a collar strategy that is rolled at the end of each quarter.