(Bloomberg) — Wall Street traders are bracing for fresh equity-market fireworks Friday after another week of global turbulence.
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In a quarterly event known as triple witching, roughly $3.5 trillion of single-stock and index-level options are set to expire, according to Goldman Sachs Group Inc. At the same time, more near-the-money options are maturing than at any time since 2019 — suggesting a bevy of investors will actively trade around those positions.
And once again, this triple witching coincides with a rebalancing of benchmark indexes including the S&P 500 — a combination that tends to spark single-day volumes that rank among the highest of the year. According to an estimate from Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the rebalance in the index alone could spur $33 billion of stock trades.
Friday’s session lands just as the S&P 500 regains its footing with a three-day jump, buoyed by the Federal Reserve’s optimism the economy can withstand rate hikes and China’s promise to bolster its financial markets. Yet in the telling of derivatives pros, the rally has been fueled by dealers covering short positions to balance exposures while demand for stock hedges is elevated.
Now as many contracts expire, the key question is whether investors will rebuild their holdings of protective puts amid growth concerns and the war in Ukraine — or will they chase the market rebound with call contracts.
“I’ve never seen an environment where you’ve had so many potential overhangs in the market that can not be controlled,” said David Wagner, a portfolio manager at Aptus Capital Advisors. “We’ll see if people can see to redeploy their puts.”
The S&P 500 has climbed almost 6% over past three sessions in the best rally since 2020, as the likes of Marko Kolanovic at JPMorgan Chase & Co. urge investors to go all-in.
Exploding derivatives volume has been a fixture of the post-pandemic market — whipsawing underlying stocks in both directions, again and again. To strategists including Charlie McElligott…