Stock-Market Doldrums Face Shake-Up With Friday’s ‘Witching’

Stock-Market Doldrums Face Shake-Up With Friday’s ‘Witching’

(Bloomberg) -- Don't be fooled by the sanguine equity reaction to the Federal Reserve's hawkish surprise. Some Wall Street strategists attribute the latest tranquility to a technical backdrop that's about to shift Friday.

The quarterly event, known as “triple witching,” occurs when options and futures on indexes and equities expire. Of particular interest are trillion dollars of options tied to benchmarks like the S&P 500 Index, whose expiration Goldman Sachs Group Inc. and Nomura Securities say may open the door for turmoil.

How the dynamics work is a complicated process that the average investor may find it hard to grasp. But in the eyes of Charlie McElligott, a cross-asset strategist at Nomura, the selling of options linked to volatility has created a “long gamma” condition where options dealers -- who typically need to hedge their positions by buying or selling the underlying stocks -- tend to go against the prevailing market trend.