Wall Street's Next Challenge After Fed: The Biggest 'Triple Witching Day' in History Hits Friday!

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, 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 25 basis points rate cut on Wednesday while signaling the central bank is ready to go more slowly on the reductions. Share volumes typically spike during the options expiration, which could cause sudden price moves because in-the-money option contracts expire automatically, leading traders to roll over their existing positions or start new ones.

However, although it is still a closely watched event, the rise of shorter-term options has allowed traders to hedge risk in a more granular way.“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.”

Historically, the week following Triple Witching Day in March, June, and September is more likely to experience a decline, while December's Triple Witching Day tends to perform the best. The S&P 500 has a 66% probability of rising in the week after options expiration, with an average return of 0.64%.

This is mainly because the week following the Triple Witching Day in December is the "Santa Claus Rally," during which investors tend to go long, and U.S. stocks are highly likely to rise.

Moreover, 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.

Source: Bloomberg, Yahoo Finance