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Quadruple Witching is a Magical Day for Markets

Quadruple Witching is a Magical Day for Markets

Information is not investment advice

Besides US Retail Sales data, Australian Unemployment Rate and New Zealand GDP this week will bring us Quadruple Witching – one of the four most important days of a year for futures and options!

What is witching day about?

Quadruple witching refers to four days during the calendar year when the contracts on four different kinds of financial assets expire. The expiration date is the point at which a position automatically closes. In other words, traders will have to decide what they want to do with their open position before the expiry date. The days are the third Friday of March, June, September, and December. The assets are:

  • Stock index options
  • Stock market index futures
  • Individual stock company options
  • Single-stock futures (not commonly traded, was called triple-witch before these were introduced)

Options contracts also expire monthly. Futures contracts expire quarterly. Because traders and institutions run out of time at the close of trading, there is a lot of portfolio re-balancing, contract rollovers, and more. The last hour of the trading session (22:00 to 23:00 GMT+3) is when the volatility really increases, and assets swing dramatically.

Is it tradeable?

Because all four types of contracts expire on the same day, the quadruple witching day is usually accompanied by bigger trading volumes and volatility. On June 18, 2021, a quadruple witching day, a near-record volume of single-stock equity options was set to expire at the end of the day in the amount of $818 billion. As a result, a near-record of single stock open interest of about $3 trillion stood on June 18, 2021. Open interest refers to how many contracts are open during any given point during the day. It is an important metric for traders to watch since a large amount of open interest can move the value of the underlying stock.

But you need to know, that these Freaky Friday days (the second name for the day is even stranger than the first) in general are not bullish or bearish. You cannot just buy or short sell and make guaranteed money. What is guaranteed, however, is that there will be a big surge of volatility. There is on average 40% more volume on this day than the average.

quad witch.jpg

Source: https://www.bloomberg.com/news/articles/2020-09-18/stock-traders-brace-for-quadruple-witching-amid-options-anxiety?sref=qgDWnyMx 

Also, note that the last hour of the session is usually bearish because long positions are prevailing against short ones, and closing these trades might cause a plunge in prices.

What to trade

US 500 and US 100 will be more volatile this Friday. Because of trading volumes, US 500 index will be able to reach distant resistance at 4370 or plunge through the 4450 level (if the Index doesn’t do this earlier this week).

US500Daily.png

The same goes for oil, gas, and gold, so keep an eye on XAU/USD, XNG/USD, and XBR/USD. Brent oil is surging for several days already, so we may see strong pullbacks to the $71 level.

XBRUSDDaily.png

In stock market, consider trading such companies as Tesla or Alcoa because they either have huge options volume or are commodity-based. Moreover, Alcoa is on the rise because the aluminum price is skyrocketing. Both rise to $52 and plunge to $46 levels are possible.

ALCOADaily.png

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