As the S&P 500 aims for an all-time high, a major challenge looms with the record $5.4 trillion options expiry scheduled for Friday. This “triple witching” event, coupled with recent market rallies and quarterly rebalancing of indices, could trigger volatile moves and higher trading volumes, which could impact market dynamics through the end of the year.
The S&P 500’s quiet climb toward an all-time high is set for a major test as a historic option expiration, totaling $5.4 trillion, approaches. Estimated by Rocky Fishman, founder of Asym 500, this massive expiration, known as “triple witching,” involves contracts tied to stocks and indices that come off the board on Friday. These developments typically lead to higher volatility and higher trading volumes as traders adjust their positions, and this one, in particular, could extend its influence into the end of the year.
Asym 500 reports that options tied to more than 8% of the S&P 500’s market cap are about to expire, which is the largest proportion in history. The timing aligns with the quarterly rebalancing of the indices, adding complexity to an already considerable event. Dave Lutz, head of ETFs at JonesTrading, suggests traders should be prepared for a challenging period, with speculation that the size of this expiration may have suppressed volatility, which could lead to a post-expiry reversal.
Despite seven consecutive weeks of gains for the S&P 500, warning signs are emerging on the technical and positioning fronts. The charts indicate overbought levels, and the Cboe Volatility Index’s drop to its lowest level since early 2020 suggests a lack of fear among traders regarding broader market swings.
Options traders, who held a positive gamma before recent comments from Federal Reserve Chair Jerome Powell, may have influenced the subdued volatility. Tier1Alpha Research notes that while fourth quarter maturities are typically higher, this one beats the previous record by an additional $1 trillion in notional exposure.
Brent Kochuba, founder of options platform SpotGamma, suggests that the recent rally prompted traders to adjust their positions before expiration, potentially mitigating huge volatility on expiration day. However, he anticipates increased volatility in the market between now and the end of the year as traders readjust their positions after the triple witch event.
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