Stocks And Scares

Image source: Vera Petruk, Vera Petruk - Shutterstock

What's going on?

A quadruple witching day on Friday saw several options and futures contracts expire, and the resulting volatility mightve spoooooked the market.

What does this mean?

Four times a year, a lot of major derivative contracts on US stocks all expire at once. That leaves investors with a decision to make: buy and keep the related shares, or roll forward those contracts by buying ones with a later expiry date.



There were $655 billion worth of single stock options set to expire on Friday, according to investment bank Goldman Sachs the third-most ever in a month. Throw in the quarterly rebalancing that always tends to happen within and between stocks and bonds, and the scene was set for higher-than-normal volatility.

Why should I care?

The bigger picture: Retail investors matter now.


Most institutional investors will have been prepared for the higher volatility, but it mightve come as a surprise to some retail investors. And while the big-hitters havent historically paid much attention to things that unsettle their smaller counterparts, they might want to start doing just that: retail investors now hold 35% of all US stocks and thanks to the recent surge in popularity of commission-free trading apps they account for one-fifth of all stock trading.



For you personally: Rebalancing helps you maximize your profits.


Not all professional investors rebalance their portfolios, but those that do might find themselves buying more bonds whose prices have fallen and yields have risen in the last few weeks at the end of this quarter. And that might be a smart move, if analysis from East West Investment Management is anything to go by: the firms dummy portfolio of Canadian stocks and bonds split 60/40 performed better when it was rebalanced than when it wasnt, and best of all when it was rebalanced on a quarterly basis.

Originally posted as part of the Finimize daily email.

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