Triple Witching has coincided with a rebalancing of benchmark indices, including the S&P 500, a combination that tends to fuel one-day volumes that are among the year’s highest.

Bloomberg: Wall Street traders are bracing for new fireworks in the stock market Friday after another week of global turbulence.

In a quarterly event known as triple Witching, Goldman Sachs Group Inc. approximately $3.5 trillion in single-stock and index-level options expire. At the same time, more near-the-money options are maturing than at any time since 2019 – suggesting that a bevy of investors will be actively trading around those positions.

And again, this triple witchcraft has coincided with a rebalancing of benchmark indices, including the S&P 500 — a combination that tends to fuel daily volumes that are among the year’s highs. According to an estimate by Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the index realignment alone could stimulate $33 billion in equity trades.

Friday’s session lands just as the S&P 500 is back on track with a three-day jump, buoyed by the Federal Reserve’s optimism that the economy is resilient to rate hikes and China’s pledge to strengthen its financial markets . But according to the derivatives professionals, the rally has been fueled by dealers hedging short positions to balance exposures, while demand for equity hedges is higher.

Also Read: Amazon Announces Stock Split Date, Ratio and Share Repurchase – View Details

With many contracts expiring, the key question is whether investors will rebuild their holdings of protective assets amid concerns about growth and the war in Ukraine — or will they chase market recovery with call contracts.

“I’ve never seen an environment where you’ve had so many potential overhangs in the market that can’t be controlled,” said David Wagner, portfolio manager at Aptus Capital Advisors. “We’ll see if people can re-bet their puts.”

The S&P 500 is up nearly 6% over the past three sessions in its best rally since 2020, as Marko Kolanovic of JPMorgan Chase & Co. urged investors to go all-in.

Exploding derivatives volume is a fixture of the post-pandemic market – knocking underlying stocks both ways over and over again. For strategists, including Charlie McElligott of Nomura Holdings, this week’s advance in the S&P 500 has been boosted again by the hedging activity of market makers.

It’s a complicated process, but it works something like this: When a dealer sells a put option, he essentially takes a bet on the underlying asset to go up. To offset this unwanted directional risk, the market maker typically sells some of the assets to maintain a neutral position. When the put options expire or are exercised, it will undo those hedging moves – potentially creating a tailwind for the asset.

Another factor involving dealers is their current “short gamma” or “short delta” position, which requires them to go with the prevailing market trends: buy stocks when they rise and sell when they fall.

According to estimates by McElligott, a cross-asset strategist at Nomura, their exposure to S&P 500 products at the beginning of the week was near the maximum “short gamut” compared to history. Three days later that changed to “zero gamma”. Along the way, dealers were forced to buy back shares and close their short positions.

With market sentiment weak and institutional funds’ exposure to equities bottoming out almost every year, caution in the derivatives market is everywhere. For example, the 20-day average of the Cboe put-call ratio for stocks is hovering around its two-year high.

“We see a general trend of continued investor risk aversion and the expectation that the stock market will remain volatile,” said Steve Sears, president of Options Solutions. “There are so many major events that can change the pace of the market that hedging and patient fortitude seems to be the message of the options market.”

Options that are well out of the money or in the money get less attention on Wall Street around the expiration date. With an unusually large number of S&P 500 contracts close to the spot price this time around, trading activity on Friday appears to be more hectic than usual, according to Goldman strategist Rocky Fishman.

“The most interesting are options that are close to the money because as we approach the expiration date, there is uncertainty about whether or not they will end up in the money,” he said. “That uncertainty could lead investors to actively trade around those positions.”

This post Wall Street Traders Brace for New Fireworks in the Stock Market’s $3.5 Trillion ‘Triple Witching’ Event

was original published at “”