Friday's "Quadruple Witching"

Discussion in 'Options' started by MarkHyman, Sep 19, 2003.

  1. MarkHyman

    MarkHyman Advanced Futures

    Friday's "quadruple witching" may spell volatility

    By Doris Frankel
    CHICAGO, Sept 17 (Reuters) - Halloween is still more than a month away,
    but witches may be at play on Wall Street this Friday brewing up volatile
    trade with the expiration of options and futures contracts.
    "Quadruple witching" -- the term used by pros to describe the expiration
    of four different options and futures contracts -- takes place each quarter
    in the stock market on a Friday. The phenomenon could spell sudden spikes
    and dips in the market as investors at the last minute either exercise their
    positions or roll them forward.
    John Person, head financial analyst with Infinity Brokerage Services,
    expects to see broomsticks flying on Friday compared to the relatively tame
    quadruple witching in March and June.
    He says investors' differing views in the wake of the Federal Reserve's
    latest deliberations could lead to volatility. On Tuesday, Fed officials
    decided to leave U.S. interest rates at 45-year lows and said rates could
    stay down for a long time to lift an economy that is losing jobs.
    "The Fed meeting on Tuesday may have raised doubts that the economy may
    recover sooner rather than later," Person said. "So in anticipation of lower
    stock valuations, investors could liquidate their cash positions and thus
    offset their derivative positions."
    On the other hand, Person said, investors who believe the recovery will
    be well underway by mid 2004 may be seeing this Friday as a continuation of
    a buying opportunity.
    "That is where the volatility comes in, because there are strong views
    on both sides," he said.
    This particular witching also comes on the heels of a slow summer that
    marks the end of the fiscal year for some corporations and the start of the
    fourth quarter for others. Fund managers could kick into high gear after the
    summer doldrums by sprucing up their portfolios for the year-end.
    Most September stock index options and some index futures such as the
    Standard & Poor's 500 <SPU3> cease trading on Thursday and settle on
    Friday's opening.
    Options contracts on the Standard & Poor's 100 <.OEX> close on Friday
    afternoon, while individual September stock options stop trading and settle
    at Friday's close.
    This year's newest addition to the brew are single-stock futures,
    contracts that allow investors to buy or sell 100 shares of an individual
    stock at a certain price on a set future date.
    At OneChicago and NQLX, the two U.S. exchanges that offer futures on
    individual stocks, September single-stock futures contracts at each exchange
    will close and settle on Friday. NQLX lists 92 September single-stock
    futures while 91 September securities contracts are offered on OneChicago.
    "I don't expect the expiration of single-stock futures to have a huge
    impact," said Jim Sauser, head equities trader at Resource Trading Group.
    A lot of players have already rolled over their positions in
    single-stock futures and have increased them in November and December,
    Sauser said.
    Richard Croft, president of Croft Financial Group, a Toronto-based
    investment firm, does not believe there will be much drama this Friday.
    "I just don't think there will be enough offsetting positions in these
    derivative products to cause any significant distortions in the stock
    market," Croft said.
    "People are interested in this phenomenon because the derivatives market
    is the the tail that ends up wagging the dog, which is the stock market,"
    Croft said. ((Reporting by Doris Franker; editing by Gary Hill; Reuters
    312-408-8750)) Wednesday, 17 September 2003 10:35:31 RTRS [nN17332838] {C}
  2. Any portfolio mgr worth his salt would not unwind huge positions during witching hour. huge slippage.

    The past witching days going back 1-2 years have been non-events save for a few anecdotal spikes which makes for good water cooler conversation ... just gives CNBC talking heads something to fill their airwaves in between their car test drives features.
  3. All of the unwinding gets done from Tuesday - Thursday, BEFORE TRIPLE WITCH.

    In other words, it is just something for all of the "Talking Heads" to speculate about on CNBC.
  4. Another thing, When I happened to tune into CNBC yesterday during a commercial break on Star Trek or Tom and Jerry, Bob Pisani (or was it someone else?) said something about index fund managers having to sell the S&P500 at the close. And indeed, right around 4:00 pm EDT, the ES fell a couple of points while the NQ were pushing higher. Let's see how this one plays out Sunday evening or Monday morning.