A "Quadruple Witching Day"

A "Quadruple Witching Day"

over 3 years ago2 mins

A “quadruple witching day” on Friday saw several options and futures contracts expire, and it threw some serious shade at a bunch of big companies’ share prices 🧙‍♂️

What does this mean?

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

But what made Friday’s event notable was last month’s frantic buying of short-term tech stock options. See, a short-term “call” option gives you the right to buy stocks for a pre-agreed higher price at some point in the near future. And when someone buys one of them, the trader who takes the other side of the bet buys those companies’ stocks at their current price so it’s ready to hand them over 🤲 That pushes their share prices higher, which in turn drives an increase in option and stock valuations. But if that bubble bursts – like it did earlier this month – the owners of those options will let them expire. And that means the traders will sell the shares they don’t need any more, putting downward pressure on stock markets.

Daily Brief Image

Why should I care?

Most institutional investors were aware of Friday’s phenomenon, but retail investors might not have been 👀 And while they haven’t historically had much of an impact on stock markets, the recent popularity of commission-free trading means retail traders now account for 20% of stock trading versus 15% last year. Their trades, then, have had a bigger effect on stock markets than most people could’ve anticipated.

Daily Brief Image

Investors are better off thinking long term, and should ideally only check on their investments to rebalance them ⚖️ Prices tend to rise over time, after all – and research has shown that the disappointment you feel from seeing your portfolio’s fallen outweighs the kick you get from seeing it rise.

Daily Brief Image
Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG