This Friday marks a quarterly event known as Triple Witching Day, when several types of exchange-traded derivatives contracts expire simultaneously. While the event itself is not expected to cause major market swings on Friday, experts warn it could lead to sudden stock moves in the following week.
Stock Price Movements Restrained by Put Option Activity
U.S. stock markets have shown relatively limited daily movement since early May. Rocky Fishman, founder of research firm Asym 500 LLC, attributes this to a “lock-in effect” caused by heavy put options trading earlier in the year.
“Lock-in” happens when stock prices gravitate toward the strike prices of popular options as expiration approaches. Earlier this year, many investors bought put options as insurance against stock declines when the S&P 500’s return to near-record highs seemed unlikely.
At the peak of tariff-related market volatility in April, bearish investors purchased protection while funding it by selling calls just above the S&P 500’s current level near 5,981 points.
“As tariffs dragged on, many thought 6,000 would be a tough level to cross, so calls around 6,000 were sold to pay for downside protection,” Fishman explained. He called this Friday’s expiration “one of the largest ever.”
Market Makers’ Hedging Plays a Key Role
Market makers and broker-dealers hedge their positions to manage risk. Their hedging activity can influence stock prices and overall market behavior.
Fishman suggests that dealer hedging helped keep markets calm since early May, despite global tensions and tariff talks. He describes the current market as being in “positive gamma,” meaning investors tend to sell when prices rise and buy when prices fall, which stabilizes markets.
This contrasts with the “tariff storm” of early April, when dealers had to sell into falling markets and buy back shares as prices recovered, worsening volatility. Matthew Thompson, co-portfolio manager at Little Harbor Advisors, confirmed this dynamic.
Thompson follows expiration events closely. They help guide the tactical decisions for the equity ETFs he co-manages with his brother.
“We focus on how dealers hedge their risk,” Thompson said in a Wednesday interview.
Triple Witching Days Usually Not More Volatile Than Monthly Expirations
Research from Citigroup strategists Vishal Vivek and Stuart Kaiser shows that quarterly triple witching days generally don’t cause more volatility than regular monthly option expirations. Still, they described this Friday’s event as “notable” in a recent client letter.
One challenge in measuring the event’s scale is the lack of a standard method to calculate the total value of derivatives expiring, since it depends on which asset classes and contracts are counted.
Citi estimates that about $5.8 trillion in notional open equity options will expire on Friday. This includes:
$4.2 trillion in index options
$708 billion in U.S. ETF options
$819 billion in single-stock options
Fishman provided a higher estimate of roughly $6.5 trillion, factoring in options on stock index futures expiring Friday.
