Triple Witching Day Sparks Volatility Fears: $3.4 Trillion Worth of Stock Options Set to Expire This Friday

This could lead to boom trading in U.S. stock options, particularly extremely short-dated zero-day-to-expiration options. The impending largest September expiry on record raises the possibility of volatile market activity by the end of the week.

Since U.S. stocks have seesawed over the past couple of weeks, a large share of options expiring on Friday are very close to being in the money, which could further exacerbate market volatility, Marshall, head of derivatives research, said.

Such high open interest is surprising, Marshall said, given that stock-market volatility remains relatively subdued. Meanwhile, trading volume in short-dated options with less than 24 hours until expiration has increased, Marshall noted, and now comprises 49% of activity in S&P 500 index options.

Nomura's derivatives analyst, Charlie McElligott, advised clients to expect potential volatility as data indicates that 10 out of the past 11 September op-ex days have seen the S&P 500 finish lower, with a median return of -0.5%. Moreover, historical data reveal that the week after September op-ex tends to be turbulent for stocks. The average performance of the S&P 500 in September is the worst among all months. McElligott also highlights the unusually large exposure on options dealers' books set to expire on Friday, which could result in more volatility as traders initiate new positions to replace expiring options. Nomura's analysis suggests that large quarterly option expiration events usually correspond with short-term market weakness.