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 Quadruple witching: what it is and what it can do to markets

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Quadruple witching: what it is and what it can do to markets Vide
PostSubject: Quadruple witching: what it is and what it can do to markets   Quadruple witching: what it is and what it can do to markets Icon_minitimeSat Sep 19, 2009 6:38 pm
Financial markets Friday are braced for “quadruple witching day.” That’s one of those rare occurrences that can send share prices on wild rides – and can send investors scrambling for a dictionary of finance.

Officially, quadruple witching occurs when expirations hit for two types of option contracts (stocks and stock indexes) and two types of futures contracts (stock indexes and single stock futures).

Don’t ask where the scary name comes from. If you’re curious, though, someone has written about the use of “haunted” language by investors.

What’s important is that these witching days come on the third Friday of March, June, September, and December.

The confluence of expirations can mean high trading volume and some extra volatility for individual stocks, as investors buy or sell shares to cover their contracts – often near the end of the day.

But it doesn’t necessarily lead to a big swing in indexes like the Standard & Poor’s 500.

Consider the last two “witching” days: March 20 and June 19. In March, the Standard & Poor’s 500 index fell nearly 2 percent on Quadruple Friday, closing at 768.54. That qualifies as a big-swing day, even in a year with some large one-day moves.

But on the June Friday, the S&P budged by a barely perceptible 0.3 percent, closing slightly higher at 921.23.

In morning trading on Sept. 18, the S&P was nearly flat at a level near 1066.

Note this, too: The trading day after a quadruple witching often sees big moves.

In June and March, the following Mondays overshadowed the Friday activity. In March it was a 7 percent one-day gain on the S&P. In June it was a 3 percent one-day loss.

Another way to look at the impact of quadruple witching is through the lens of a widely watched index of market volatility, based on trading at the Chicago Board Options Exchange (ticker symbol VIX).

In June, volatility tracked by the VIX index was actually lower on the Quadruple Friday than on surrounding days.

In March, volatility jumped upward on Quadruple Friday. But the VIX was even higher a couple of weeks earlier, as investors were spooked not by “witches” but by questions about whether government policies would successfully end the financial crisis. Stock indexes hit bottom a few days later.

Bottom line: Quadruple witching days can spawn some extra uncertainty in markets, but they’re usually not as scary as the name implies.

http://features.csmonitor.com/economyrebuild/2009/09/18/quadruple-witching-what-it-is-and-what-it-can-do-to-markets/
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