Quadruple Witching
This Friday, contracts on four different kinds of financial assets expire. These assets are derivatives of stock index futures, stock index options, stock options, and single stock futures. Since all four happen the same day (which only happens four time a year) this day is referred to as a quadruple witching day. The term witching is used as normally there is a lot of volume and volatility on these days. Transactions take place in in milliseconds and machines are programed to settle outstanding contracts, particularly at market close. The trading volume, volatility and velocity can mean chaos in the market. There may be sudden large swings, particularly at the end of the day. No one know for sure exactly how the day will unfold, but there is generally at least 50% more volume, so it will be busy.
Despite all the talk on business news channels, for investors, quadruple witching days mean very little; just stand back and watch. For traders, there can be price swings in some stocks that can provide an arbitrage opportunity. They may dart in and out of particular stocks or options depending on market swings. The bigger issue for all market participants is that the volume of stocks traded on quad witching days often means the following week, things are quieter than normal as everything settles out. Given that the market is currently in a wait-and-see mode, this quiet may be seen as a further indication that the market is weak. It could tip the market into the negative for the rest of September.
Given I’m an option trader, and the market has been down, I will be put some stocks this weekend. I have four sets of contracts that expire this Friday, so the shares will simply appear in my account on Saturday morning. Of course, there is a corresponding reduction in cash in my account as well to pay for the shares at the strike price I agreed to. I keep cash in my account for just this purpose, I try to have ready cash to pay for any shares I am put. If I did not have the cash, I could borrow on the margin or sell other stock to pay for my new ones. I try very hard to never trigger the use of margin - I pay interest on that.
I’m already writing calls on these soon-to-be owned stocks. Since on quad witching days, options prices tend to fluctuate as well, I want to be in a position to capitalize on it. I am fine being put these stocks as I have wanted to own them. Since I do not really own the stock yet, the calls I am selling are uncovered calls. Normally, I would never write an uncovered call but owning them next week it as close to a sure thing as you can get in the stock market.
So unless you are actively trading, just be aware of quad witching days and their potential impact on the following week. It is good to learn the slang.
Markets Today: After many down days, the market paused and turned up a little. I think it was the a guest on the CNBC half time report that asked people to step back and look at the economy of the US and quit being so pessimistic. Covid will end, the supply bottlenecks will ease and people will get back to work. This bodes well for the market longer term. Basically: Chill. I agree, but meantime I continue to be cautious. Few trades today and I’m still selling more calls than puts. Waiting to get out of the options penalty box I have built for myself - which I will on Friday. Welcome the Witch.