“It could be an extra hairy quadruple witching...”

That's the ominous warning from Henry Schwartz, founder of options data provider Trade Alert, ahead of tomorrow's major option expirations. As The Wall Street Journal reports, tomorrow is shaping up as potentially one of the most volatile trading days in years, as scheduled changes in futures, options and other derivatives markets threaten to add to a frenzied trading month that has already had some of the biggest daily stock-index swings ever.

The reason this 'quad witch' is more anxiety-inducing than normal is simple - options contracts outstanding tied to the S&P 500 Index hit a record this week. More than $1.5 trillion worth of S&P 500 options were slated to expire Friday, about a third of the contracts outstanding, according to Trade Alert data.

“Right now I would say buckle in,” said Steve Sosnick, chief strategist at Interactive Brokers, on the next few trading sessions. “Those moves in both directions can really be exacerbated.”

Earlier in the week, we detailed how typically - during 'quad witch' week - vol has collapsed and stocks surged, no matter what the news.

But, this week (and last) has been different, to say the least...

In fact, the recent volatility in markets has become so extreme that CBOE has introduced new levels at which options tied to the VIX can be exercised, and said last week that it would suspend open outcry trading as a “precautionary measure to prevent the potential spread of the novel coronavirus.”

But, despite all this fear of tomorrow, there is a silver-lining.

Once we get through tomorrow's quad-witch, Nomura's Charlie McElligott expects that this "large decline in the gamma post-expiration" should allow markets to pivot back to a much more “neutral”/less extreme hedging stance for Dealers, "meaning incrementally less sensitivity to changes in underlying Delta and thus, forced hedging “momentum” (selling into selloffs, buying into rallies).

McElligott expect tomorrow's "Quad Witch" expiry to have the potential "for nearly 47% of the $Gamma to drop-off."

This could even ultimately move us closer to a place where “rich vol” may in-fact be sold again to Dealers, which could then mean a partial return to standard “long Gamma” insulating flows (hedging flows which buy dips, sell strength) - although CLEARLY still, all of this is subject to the progression of the Virus and the impact it will have on global growth and risk-sentiment."