Friday, March 19, 2010

Quadruple Witching Day

The third Friday of March (today), June, September, and December is known as "Quadruple Witching Day", a reference to the fact that on those days four major types of contracts (stock index futures, stock index options, stock options, and single stock futures) all expire.  Trading is known to be more volatile on such days, especially the "Quadruple Witching Hour" - the last hour before the markets close.  The reason?  Active traders want to unwind their interests in futures and options contracts before said contracts expire - and then replace or repurchase them.  All this trading results in increased trading volume and, as a result, increased volatility.  Options volatility is measured by the VIX.  As an aside, yesterday saw a large amount of VIX call options bought (options on a derivative that is itself derived from options on equities!), suggesting some people expect volatility to spike during the next month.  It remains to be seen whether such a spike might be caused by a slide in stocks or geopolitical event - if it happens at all!  Long-term investors need not worry about "witching days" and should probably avoid trading on them.  The rest of us need to grab our best broom!