(Bloomberg) — US stocks’ rebound off of last week’s lows will face a latest test on Friday, when a pile of options contracts are set to run out in a quarterly event that always stoked volatility prior to now.
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The so-called “triple-witching” will see about $4.5 trillion of contracts tied to stocks, indexes and exchange-traded funds mature, estimates compiled by Citigroup Inc. show.
An enormous chunk of those contracts is ready to run out essentially worthless, prompting some market watchers to be skeptical that the event will result in outsized moves attributable to dealers attempting to hedge positions. Still, the event was prior to now known for causing sudden price moves as contracts disappear and traders roll over their existing positions.
To IUR Capital’s Gareth Ryan, the day before an enormous contract expiry might be as energetic because the OpEx session itself.
“While a variety of volume may very well be done on listed products on the choices expiry day itself, Thursday could also see a variety of activity around roll-outs, roll-downs and position closing, particularly on short options which can not have to be held to expiry day,” said Ryan.
The last ‘triple witching’ event on Dec. 20 got here days after the Cboe VIX Index spiked above 28 as hawkish projections from the Federal Reserve sparked the most important rout within the benchmark equity gauge since early August.
The mood was calmer on Wednesday, when the S&P 500 jumped 1.1% as Powell said there’s no reason to alter the present path of monetary policy, easing concerns about recession and inflation. Anxiety concerning the impact of President Donald Trump’s trade policies on the economy pushed the S&P 500 right into a correction last week.
Read: Powell Reassures on Economy and Beaten Stock Bulls Jump Back In
The quarterly OpEx event will likely send volumes flying as traders will unwind their wagers while dealers will roll any outstanding VIX futures positions to the following monthly expiry. Whether that may morph into wider stock-market swings stays to be seen.
To Citi equity trading strategist Vishal Vivek, Friday’s triple-witching is “less important” relative to past events, based on lower than historical open interest outstanding, and comparatively neutral dealer positioning.
“Dealers have been prepared for that endlessly,” said Kevin Darby, vp of execution technologies at CQG, a financial software provider. “It’s the stuff they like to do: they mainly just take edge, they hedge it out in an extra month and let the gamblers gamble.”