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Quadruple witching day

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What's going on?

Something wicked this way came on Friday as a quadruple witching day in the US brought the potential for higher-than-normal trading volumes and positively Jacobean volatility.

What does this mean?

No, a fourth sorceress hasnt joined the cast of Shakespeares great tragedy. Quadruple witching day is instead the term investors use when several major US options and futures contracts simultaneously expire which often coincides with a rebalancing of major stock market indexes.


A stock futures contract obliges its owner to buy shares at a set price on a predetermined date while an options contract gives its holder the choice of doing so. With many such contracts expiring on Friday including $1.8 trillion worth of S&P 500-based options investors had to decide whether to buy and keep the related shares or else roll their contracts forward by buying options or futures with a later expiry date.

Why should I care?

The bigger picture: Easy does it.

According to investment bank Goldman Sachs, only about a third of the expiring S&P 500 options were within 10% of the indexs price last week. The further from the mark they are, the lower the options value and so there werent actually that many fluctuating wildly in price. Indeed, Goldman argued prior to Friday that June options were less likely to generate market-moving flows of cash into and out of stocks than their sheer volume would ordinarily imply.



For markets: As clear as mud.

Investors updating their options and futures positions alongside others doing business as usual in the stock market is a recipe for elevated price swings both up and down. After rising some 40% from their March trough, some analysts reckon US stocks are set for a downward trend this week while also acknowledging that, like first-year Transfiguration, the outcome of quadruple witching is difficult to predict (tweet this).

Originally posted as part of the Finimize daily email.

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