over 3 years ago • 2 mins
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 🧙♂️
No, a fourth sorceress hasn’t joined the cast of Shakespeare’s 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.
According to investment bank Goldman Sachs, only about a third of the expiring S&P 500 options were within 10% of the index’s price last week 🏦 The further from the mark they are, the lower the options’ value – and so there weren’t 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.
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.
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