Traders brace for volatility as more than $5 trillion in options set to expire in latest 'triple witching'

By Joseph Adinolfi

It's not the biggest quarterly expiration on record, but it's still pretty large

It's that time again: Investors will see option contracts tied to more than $5 trillion in tradeable stocks expire on Friday in the latest quarterly "triple witching" event.

Derivatives-market experts told MarketWatch that the latest quarterly expiration of options and futures contracts could unleash another bout of volatility in markets - just as the Cboe Volatility Index VIX, known as the VIX or Wall Street's "fear gauge," has nearly finished reversing its spike from earlier this month. The index finished at 16.33 on Thursday, FactSet data showed.

Data shared with MarketWatch by options-market research firm Asym 500 estimates the notional value of options due to expire at $5.1 trillion, although the number could change slightly heading into Friday. That reflects the value of the underlying stocks that each contract would entitle the holder to buy or sell if all contracts were to expire in the money.

While that's not quite a record amount, it's close: It's larger than the roughly $5.1 trillion quarterly number from the March expiration, but smaller than the roughly $5.5 trillion seen in June, according to Brent Kochuba, founder of SpotGamma, a provider of data and analytics on the options market.

"It's going to be another big one," said Matt Thompson, a co-portfolio manager at Little Harbor Advisors, during an interview with MarketWatch.

Options trading has soared over the past few years, and volume is on track for another calendar-year record in 2024, according to data from Cboe Global Markets.

There have been signs that this jump in activity has been spilling over into the broader equity market. Stocks have tended to fall during monthly options-expiration days in 2024, including during both of the last two "triple witching" days, FactSet data showed.

"That exposure creates ripples in the market," Thompson said.

Adding to a potentially chaotic setup for U.S. markets on Friday, the Bank of Japan will wrap up its latest monthly policy meeting overnight - or Friday in Tokyo - and release its latest decision on interest rates. The BoJ's decision to raise its policy rate by 15 basis points in late July helped spark the vicious unwind of the Japanese yen (USDJPY) carry trade a few days later.

Japanese stocks JP:NIK suffered their worst day since 1987 as a result, while the S&P 500 SPX saw its biggest drop in nearly two years, Dow Jones Market Data showed.

Thompson said the BoJ decision could potentially rattle U.S. markets once again on Friday. He also noted that the latest S&P 500 index rebalancing is set to be finalized, potentially sparking more volatility in stocks around the close.

Regardless of what happens on Friday, there's reason to suspect that more volatility could follow over the next week, Kochuba said. The latest batch of options set to expire has been heavily tilted toward bullish calls, with bullish contracts tied to Nvidia Corp. (NVDA) seeing particularly active trading in September, he said.

This has allowed options dealers to shift their hedges in a way that has helped to dampen volatility, Kochuba added. But that could change as traders start to rebuild positions over the next week, forcing dealers to once again adjust their hedges accordingly.

U.S. stocks sold off hard during the first week of September, but have already recovered those losses.

Both the S&P 500 and Dow Jones Industrial Average DJIA finished in record territory on Thursday, though the market initially seesawed after the Federal Reserve decided to cut its policy interest rate by 50 basis points on Wednesday.

The Nasdaq Composite COMP also rose, but remained below its most recent record close from July.

To be sure, plenty of other factors influence markets aside from options trading. And with so much fundamental news impacting asset prices, Asym 500's Rocky Fishman said the technical impact from the September options expiration could be limited on Friday.

"With investors continuing to assess the impact of the 50-bp Fed cut and watching the BOJ's next move tonight, there's enough fundamental news this week that technical effects of this expiration are likely to be limited," he told MarketWatch via email on Thursday.

-Joseph Adinolfi

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09-19-24 1730ET

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