Options contracts tied to more than $5 trillion worth of stocks, exchange-traded funds and indexes will expire Friday, as the latest “triple witching” expiration collides with the rebalancing of the S&P 500 and Nasdaq-100.
The result could be a tense and potentially extremely volatile session in which tens of billions of contracts and shares could change hands, market strategists said.
According to figures from Rocky Fishman, founder of Asym500, options with a notional value of $5.3 trillion will expire, with the largest slug expiring before the open.
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On the one hand, many traders will cash in on deep-money bullish bets, while some roll over their positions, forcing market makers to continue hedging their exposure.
At the same time, index fund managers will have to adjust their investments before the announced index changes take effect.
Trading volume has been higher all week. In the U.S. market, 17 billion shares changed hands on Thursday, Steve Sosnick, chief market strategist at Interactive Brokers, said in a telephone interview with MarketWatch. That’s an increase from 10.6 billion on Tuesday.
“I expect to see huge volumes tomorrow in many popular names,” Sosnick said.
“Not only will this be the largest option expiration of the year (as is typical for December), but it is also currently shaping up to be the largest SPX option expiration in more than a decade,” Fishman said in a report shared with MarketWatch . .
Brent Kochuba, founder of Spotgamma, a provider of options market analytics, went even further during a phone interview with MarketWatch: “This could be the largest options expiration ever.”
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As markets rallied, traders have been snapping up bullish options contracts at a record pace, according to data from Cboe Global Markets, the largest operator of options exchanges in the US.
For S&P 500-linked options, typically the most popular product, 4.8 million contracts changed hands on Thursday, a new record, surpassing the previous record set on November 14, according to Cboe.
In addition, total call trading volume for all U.S. stock options exceeded 30 million contracts on Wednesday, according to Goldman Sachs Group, making it one of the busiest days for bullish contract trading this year.
Aggressive call buying over the past month has helped keep the S&P 500 just below record highs, options market experts say. The S&P 500 SPX rose 8.9% in November, the best month of 2023, and the 18th best-performing month of the past 73 years. And according to data from FactSet, the stock has continued to rise in December, after rising 3.3% through Thursday’s close.
Earlier this week, options strategists warned that markets could be in trouble at 4,600 on the S&P 500. They warned that a “call wall” of open interest in bullish contracts around that level could force market makers to break the rally.
Instead, bullish traders blew through the call wall and pushed it higher to 4,700, Kochuba said.
The S&P 500 closed Thursday at 4,719.55, its highest close since Jan. 12, 2022, according to data from FactSet. The index is now within 1.75 percentage points of the record high of 4,796.56 on January 3, 2022.
Traders’ bullishness recently helped boost the Cboe Volatility Index VIX,
to a multi-year low, according to data from FactSet, also known as Wall Street’s “fear gauge.”
To be fair, it’s not just the options and contracts from the S&P 500 that are linked to popular stocks like Tesla Inc. TSLA,
seeing explosive volume: calls linked to the iShares Russell 2000 ETF IWM,
which tracks the small-cap Russell 2000, reached 1.35 million contracts, the third highest ever, according to Goldman. Activity in options contracts linked to small-cap stock indices has risen sharply since late October.
Heavy call buying has pushed the put-call skew for S&P 500 options to its lowest level in a year, according to data from Goldman Sachs Group.
This shows that investors are scrambling to buy bullish contracts while largely avoiding bearish contracts as stocks moved higher. Goldman analysts described Friday as “the last major liquidity event of the year” in a note to clients obtained by MarketWatch.
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‘Triple Witching’ days take place once a quarter. They are so called because options tied to individual stocks, ETFs and indexes will expire, in addition to futures contracts that track the index. Options market experts say they are typically associated with more intraday swings and higher trading volume.
What makes things even more interesting is the fact that the quarterly rebalancing of the S&P 500 and Nasdaq-100 will take effect after the markets close on Friday.
Normally, the rebalancing would draw major attention this quarter, following an extremely rare ad hoc rebalancing over the summer to rein in the influence of mega-cap stocks in the Nasdaq-100.
Earlier this month, Standard & Poor’s announced its rebalancing plans, including reducing the weighting of two Magnificent Seven stocks, Apple Inc. AAPL,
and Alphabet Inc. GOOG,
GOOGL,
At the same time, Amazon.com Inc. AMZN,
which is also part of the Mag 7, will receive a higher weighting. Meanwhile, three companies will join the index, including Uber Inc. UBER,
while shares of three other companies disappear.
Kochuba thinks Friday’s expiration could remove the last barrier holding back stock prices from soaring to record highs before the end of the year.
“After OpEx, markets will move more freely,” Kochuba said.
OptionMetrics’ Garrett DeSimone cautioned that investors shouldn’t put too much weight on options market activity and other technical factors.
“Ultimately, macro trumps everything,” he said during an interview with MarketWatch.