As if uncertainty weren't high enough on Wall Street, the quarterly expiration of stock and index options and index futures, known as triple-witching, is set for this Friday. But some participants say there's a chance it could cushion stocks this time around.
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Triple-witching tends to add a dose of volatility to the market. Throngs of investors step up to unwind their expiring contracts in options and futures, and to buy and sell new options and futures contracts to cover for losses, or to cash in on gains. All of this buying and selling usually causes prices to fluctuate more dramatically, making it more difficult for Joe Investor to determine price direction.
But market strategists say volatility levels are already so high in the wake of last week's terrorist attacks that the swings associated with expiration, in and of themselves, won't make a big difference. The S&P 500 volatility index, or VIX, has a rolling 12-month average of 27, but rocketed to about 48 on Monday. Volatility soared to the low 50s during the Asian crisis and has been more than 40 just 17 times in the past five years. While it fell Tuesday, the latest wave of selling has moved it up to around 45. Expiration week tends to add just one or two points to the index.
"We'll probably just see more of the same," said Peter Boockvar, equity strategist at Miller Tabak. "This market is crazy to begin with. The volatility is extremely high." Boockvar said it's unlikely that expiration would push the VIX up into the low 50s.
Philip Ruffat, senior vice president and manager of Fuji Futures, agreed, saying it would take more huge moves to fire up volatility. "Unless we have a major selloff -- say, because a bailout package for the airlines doesn't go through -- it probably won't spike up. We're way beyond that now."
A couple of traders said the expiration has the potential to cushion this week's losses, but that will depend on how much of Monday's plunge was led by expiration-related program selling. The extent of sell programs Monday is hard to measure, and questionable. Because trading opened late, sell programs, which are initiated by computers when stocks fall to certain price levels, may not have been able to operate normally.
Institutional investors might have been careful about activating big program sells anyway, said Steven Goldman, market strategist at Weeden, because of the rally cry for patriotic buying.
"It could have an upward bias, but it's hard to tell because we don't know how many sell programs were unraveled this week," said Goldman.