Hosted by Aaron Bry and Dennis Dick, the discussion highlighted how the massive expiration of key options contracts can drive unusual market activity and set the stage for turbulence ahead.
Triple witching, which occurs quarterly on the third Friday of March, June, September, and December, is when stock index futures, stock index options, and individual stock options expire simultaneously.
This event often creates market turbulence, as traders scramble to close, roll over, or offset expiring contracts.
Over $5 trillion in notional options, including $605 billion in single-stock options, are expected to expire during Friday’s session.
Historically, triple witching has led to increased volatility and unusual price movements. The S&P 500, tracked by the SPDRS&P 500 ETF Trust (NYSE:SPY), closed in the red on the last three triple witching days:
June 21, 2024: S&P 500 fell by 0.5%.
March 15, 2024: S&P 500 dropped by 1%.
Dec. 15, 2023: S&P 500 declined by 0.6%.
Historical Weakness Post-Witching Week
During his appearance on Benzinga PreMarket Prep, CC Lagator explained how the convergence of expiring options impacts the market.
“You might see some imbalances that you wouldn’t have seen on a normal day at the open,” CC Lagator said, highlighting how trading activity starts to unwind a couple of days before but accelerates toward the close of the session.
This often stems from big hedge funds and mutual funds rolling options positions into the next month, which can lead to increased volatility. He further noted that the market environment shifts drastically after triple witching, with traders facing a completely new landscape in the following week.
“Next week historically is a terrible week going back decades,” Lagator said, noting that the week after triple witching in September has rarely shown positive returns over the last 30 years.
With volatility expected to pick up, he cautioned that traders should brace for a challenging week due to the impact of unwinding positions on the broader market.
The conversation also turned to the Volatility Index (VIX), often referred to as the “fear gauge,” which CC Lagator described as being relatively low and attractive for call option buyers at these levels.
“The VIX is at 16 right now, it’s not high,” CC Lagator stated, adding that it trades below its long-term average of 19.
“If this was July and we were at all-time highs, the VIX would probably be 13,” he noted, attributing the slight uptick to recent market events and the seasonal volatility that accompanies the fall months.
“For traders looking at the next month and a half, there’s not much worry about volatility dropping much lower than where it is now,” Lagator predicted, adding that “we’re probably not seeing it hit 12 until Christmas.”
Lagator advised that traders could use this period of low volatility to their advantage when considering options positions.
“If you were buying at-the-money options right now, you probably don’t have much to worry about in terms of volatility going much lower,” he said, emphasizing the stability of current volatility levels as a potential buying opportunity for those seeking to hedge or position themselves for a breakout.
A similar view has also been shared by Goldman Sachs, which estimates that, given macroeconomic conditions, the VIX should be at 24.5 points.
The investment bank issued a recommendation for investors to hedge their portfolios using VIX calls. Specifically, Goldman Sachs analysts advise buying CBOE Volatility Index (VIX) November calls at a strike price of 18.
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