(Bloomberg) -- As Wall Street traders come to grips with the Federal Reserve’s plans to slow the pace of interest-rate cuts, Friday’s US options expiration that has historically stoked turbulence offers a final hurdle to end-of-year calm.
The quarterly “triple-witching” will see some $6.5 trillion worth of options tied to individual stocks, indexes and exchange-traded funds fall off the board — this year’s largest and among the biggest on record, though still slightly smaller than a year ago, according to an estimate from derivatives analytical firm Asym 500.
This quarter’s expiration comes at a critical time for market positioning following the Fed’s decision on Wednesday to lower borrowing costs for a third straight meeting while signaling the central bank is ready to go more slowly on the reductions. While the risk is sometimes overblown by Wall Street players, share volumes typically spike during the options expiration, which has a reputation for causing sudden price moves as contracts disappear and traders roll over their existing positions or start new ones.
The size of expiring options positions is 2-to-1 in favor of calls versus puts, which helped stocks deliver gains in four of the past six weeks, according to Brent Kochuba, founder of options platform SpotGamma. The biggest single-stock names include those that also hold some of the largest weightings in the S&P 500, including Tesla Inc., Nvidia Corp., Apple Inc., Meta Platforms Inc., Microsoft Corp. and Amazon.com Inc., he said.
“We suspect that traders are going to be selling some of their December OPEX puts Thursday and Friday, which is why the market is a bit more stable,” Kochuba said. “The removal of these OPEX positions could release volatility again into end-of-year.”
Once again, the options expiry coincides with the rebalancing of benchmark indexes including the S&P 500, suggesting a bevy of investors will actively trade around those positions, with single-day volumes typically ranking among the highest of the year. Before the market opens on Monday, Apollo Global Management Inc. and Workday Inc. will replace Qorvo Inc. and Amentum Holdings Inc. in the S&P 500.
While still a closely watched event, the rise of shorter-term options has allowed traders to hedge risk in a more granular way, leaving them less reliant on contracts expiring the third Friday of the month and taking some of the drama out of triple-witching.
“Each specific expiration has less impact these days because there are so many expirations thanks to daily options,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “Also, because the S&P has been rallying since the election, most of the put open interest is out of the money and not impactful.”
While the S&P 500 Index has notched 57 records in 2024, on Wednesday it snapped a streak of 21 sessions without a drop of more than 1%, according to data compiled by Bloomberg. That propelled the Cboe Volatility Index, or VIX — which gauges expected swings in the S&P 500 — to its highest since early August, which then coincided with the unwinding of a massive, yen-fueled carry trade that rattled global bond markets.
The S&P 500’s 2.3% gain since Election Day has “left the bulk of expiring strike prices well below the current market level, so gamma impact is likely to be limited,” according to Rocky Fishman, founder of Asym 500.
One more year-end options market event may pave the way for more volatility into 2025. The Dec. 31 rollover of the $21 billion JPMorgan Hedged Equity Fund’s (JHEQX) short position in S&P 500 call options will remove 45,000 contracts struck at 6,055, according to Kochuba, which is expected to free the market for larger moves. The quarterly rollover is normally uneventful, except when the S&P nears one side of the position.