Everything is fine third Friday Of March, June, September And Decemberi markets Global financials face a technical event capable of generating a surge in the volumes of exchange.
Is the Quadruple Witching Daythe simultaneous expiry of four categories of contracts derivatives.
What happens during the Quadruple Witching Day
The expression is borrowed from Anglo -Saxon folklore (Witching means witchcraft) and in the financial sphere was coined in the 1980s. In summary, it evokes the notorious “hour of witches”.
But in this context, however, the witches and sorcerers are not obscure servants of the infernal powers, but instead the options on actions and indexes, the future on the indices and, at least until 2020 in the United States, the future on single actions.
The phenomenon focuses above all in theLast hour of contractedknown as Witching hour. In this period of time, the closing, extension and realignment of derivative positions multiply. The expiring contracts are closed or “rolled” on new deadlines, with operations involving large quantities of underlying securities.
This convergence of deadlines generates strong operational pressure, often accompanied by volumes exchange higher than average. An “infernal” work, if we want. But it is still to be said that the volatility of prices is not said that it always and in any case increases, since the market, in most cases, manages to absorb the flow without excessive failures, managing to self -regulate.
What does the Quadruple Witching Day understand
The four original categories of derivative tools involved in the Quadruple Witching Day are:
- the options on shares, which confer the right (but not the obligation) to purchase or sell a title at a pre -established price;
- the options on the indices, which work similarly, but with an equity index underlying and are adjusted in cash;
- The future on the indices, which oblige the parties to purchase or sale of the index to a future date and a set price;
- Single-stock futures, or future on single titles but today are no longer negotiated in the USA, despite being still present in other markets. From the end of the US market markets on single actions, we are more properly talked about than Triple Witching Day.
Because these dates are important
The Quadruple Witching Day (or Triple, if we want) is crucial for market makers, which close the coverage positions associated with the expiring contracts. The managers of indexed funds also actively participate, taking advantage of the day to carry out periodic rebalancing.
The temporary distortions that can occur, in particular when the price of a title tends to gravitate around a very liquid strike price (a phenomenon known as pinning), open the door to arbitrage strategies. In these cases, the traders try to exploit the momentary deviations between the prices of the derivative tools and those of the underlying elements (actions, stock exchange indexes, future, etc.).
The concrete effects on the market
Quadruple Witching generates peaks in volumes and intense short -term activity. Second data Reutersfor example, on March 15, 2019, which fell on a day of Quadruple Witching Day, the volumes on US bags reached 10.8 billion actions, against an average of 7.5 billion in the previous twenty days.
But isolating the effect of the quadruple witching day on prices and performance is still complicated, since the days often coincide with Other relevant events As advertisements for monetary policy, publications of quarterly budgets or macroeconomic updates. In other words, the events of the Quadruple Witching Day must be understood as trends to be interpreted and ride, not as granite certainties.
