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Traders are bracing for a volatile session on Friday as over $5 trillion of options contracts are poised to expire on the same day.

Traders are bracing for a “triple witching” event on Friday, a market phenomenon where stock index futures, stock index options, and stock options all expire on the same day. With over $5 trillion in contracts poised to expire, investors and analysts expect significantly increased trading activity and market volatility.
 

What is ‘Triple Witching’?

Options contracts linked to trillions of dollars in stocks, exchange-traded funds, and indexes are poised to expire simultaneously this Friday, marking the convergence of the latest “triple witching” expiration event with the S&P 500 and Nasdaq-100 rebalancing.

Typically occurring on the third Friday of March, June, September, and December, this event often sparks increased trading activity as investors adjust their positions, leading to heightened market volatility. Traders rushing to settle or roll over their contracts can cause fluctuations in stock prices, contributing to the characteristic volatility associated with triple-witching days.

According to market strategists, today’s upcoming triple witching could be extremely volatile, with tens of billions of contracts and shares expected to be traded. 

To be more concrete, numerous traders will be taking profits from their profitable bets, and others will be shifting positions, forcing market-makers to keep adjusting their risks. Simultaneously, fund managers tracking indexes must update their holdings before the planned index rebalancing occurs.
 

$5.3 Trillion Options to Expire on Friday

Trading volume across markets has already been rising throughout this week. The US market saw 17 billion shares change hands on Thursday, up from 10.6 billion on Tuesday, said Steve Sosnick, chief market strategist at Interactive Brokers.

However, the Friday session is expected to take trading volumes and volatility to a higher level due to triple witching. According to Asym500 founder Rocky Fishman, options contracts with a notional value of a whopping $5.3 trillion are expected to expire today, with the biggest group expiring ahead of the market opening. 

Friday marks the end of another victorious week for US equities, which have been on a relentless rally since late October. However, this week was particularly bullish because the Federal Reserve confirmed its plans for a dovish pivot in 2024, sending the Dow Jones index to a new all-time high. At the same time, the tech-driven S&P 500 broke above 4,700, a level unseen since December 2021. 

Amidst this rally, the S&P 500’s volatility gauge has been at its lowest since January 2020, mainly due to the improved market sentiment as investors grow increasingly confident that the US economy will pull off the so-called “soft landing.” Additionally, the Fed confirming rate cuts for 2024 also boosted optimism. 

However, strategists expect the volatility index, VIX, to rebound in 2024, citing expectations of a different macroeconomic landscape.

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