Amid Options Anxiety, Quadruple Witching Spurs Bursts of Trading

Equity transactions surged Friday amid a quarterly event known as quadruple witching, when options and futures on indexes and equities expire. About 14 billion shares changed hands, roughly 40% above the three-month average. The S&P 500 tumbled almost 2% before paring the loss by half at the close.

The event got more attention than usual this time around because options activity from small investors and the so-called Nasdaq whale have been blamed for whipping up turbulence in internet and software shares. Despite an 11% drop in the Nasdaq 100 from its Sept. 2 peak through Thursday, open interest on bullish contracts tied to the gauge remained elevated. So were calls linked to shares of tech titans like Apple Inc. and Facebook Inc.

While spikes in volume usually occur around the open and close, providing windows of robust liquidity, large price swings can happen suddenly at any time of the day as large derivatives positions rollover.

The expiration event usually coincides with a rebalancing of major indexes such as the S&P 500 and can spark some of the busiest trading days of the year. This time, index rebalancing alone could force $32.4 billion of trades, S&P Dow Jones estimated.

One reason behind the shortfall is the robust use of short-dated options, especially calls sought by day traders to chase market winners, Murphy said. Because these options expire within days or weeks, few are left for quadruple witching.

Options contracts with maturities less than two weeks out comprised 75% of all trades in July, a record high, according to data compiled by Goldman Sachs Group Inc.

Another unusual feature this time around is the popularity of single-stock options, particularly bullish wagers, as investors chase stock winners, rather than hedging against broad market losses. At the start of September, single stock call option volumes averaged $335 billion over 10 days, approaching the notional volume traded in index put options for the first time in at least three years, Goldman data shows.

That preference is likely to shift in the coming months amid macro risks ranging from the U.S. presidential election to the path of economic reopening and trade tensions with China, according to David Silber, head of institutional equity derivatives at Citadel Securities.