Wall Street’s $5.5 Trillion Triple Stretch to Test Market Serenity

(Bloomberg) — Friday’s U.S. options expiration could provide volatility-starved traders with some short-term market swings.

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The so-called ‘triple witch’ will see around $5.5 trillion in options linked to indices, stocks and exchange-traded funds, according to an estimate by options platform SpotGamma. As the contracts disappear, investors will adjust their positions, adding a surge of volume capable of shaking up individual holdings.

This quarter’s expiration comes as implied volatility in S&P 500 options is holding near its lowest level since before the coronavirus pandemic, with the benchmark U.S. index outpacing gains in Nvidia Corp. shares. and other companies related to artificial intelligence. Expiry coincides with index rebalancing, when the S&P Dow Jones Indices switch company weightings and ETFs that track its gauges make similar adjustments.

After closing positions, taking with it about $5 billion in so-called «long range,» the market could be set for a touch of turbulence, according to Scott Rubner, managing director of the global markets division and tactician at Goldman Sachs Group. Inc.

Friday’s stack of events as well as next Friday’s session, which will see the Russell indices reshuffle, «will be explosive trading sessions as we see classic asset managers take more active advantage of excess volumes and tactically trade positions around,» Rubner wrote.

This time, the expiration value associated with calls is about 11 times greater than the hypothetical value of kisses – according to Brent Kochuba, founder of SpotGamma. This is a stretch from last quarter when the ratio was closer to 5:1. The widening of the gap signals a growing demand for positive exposure, along with a shrinking desire to sell. It could also bring benchmarks and heavily traded stocks down slightly on Friday and early next week, he said.

«The options complex is very upside down,» Kochuba said. «Things will start to consolidate and the market will become a little more volatile.»

While mom and pop investors may barely notice the happenings, marketers certainly will. For them, large expirations mean difficult choices: rotate or offset positions, or close them entirely. Twists and turns can induce increased spin, especially in the final hour of trading, known – aptly – as the ‘triple magic hour’.

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Estimates about the exact size of the expiration vary based on how analysts calculate it; Citigroup, for example, published a smaller figure of $4.8 trillion. Regardless of the exact numbers, forecasters say the amount due Friday should be roughly in line with the last two quarterly expirations in March and December.

Market participants caution that the impacts of quarterly option expirations tend to be overstated. However, even small movements in stocks can differ from the extreme calm of recent times. While the notional value of expiring options may be rising, so is the overall market, said Rocky Fishman, founder of derivatives analytics firm Asym 500.

«All the numbers get bigger over time as the economy gets bigger and the value of the stock market gets bigger,» Fishman said. «But measured as a percentage of stock market size, I’m sure we’re well behind last December.»

This quarter, outside of a brief spike in April, the Cboe Volatility Index, or VIX, has held near its lowest level since the start of 2020. The growing popularity of options-selling ETFs, as well as more volatile small daily lows as indexes edge higher have discouraged traders from buying protection against a selloff. The S&P 500 is on track for a nearly 4% advance in the second quarter for its third straight period of gains.

Nvidia will also play an additional role this time, Kochuba said. The value of Nvidia-related contracts set to expire is the second largest of any underlying asset, trailing only the S&P 500. That tops the SPDR S&P 500 ETF Trust (ticker SPY) as well as the Nasdaq 100 and the ETF’s most popular that it tracks – reversing the patterns of previous expirations in a sign of the chipmaker’s huge influence on the wider market.

– With the help of Natalia Kniazhevich.

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