Triple Witching Friday is "an event that occurs when the contracts for the stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December." It just so happens that today is that day.
Today I expect to see large volumes of buying and/or selling as investors try to cover their open positions. Typically I gauge a reasonable expectations for these events by examining the months leading up to them. (Index volatility, % gains, open interest, volume, etc.) Given that this quarter has been particularly bullish for most of these indexes, I expect those who sold the naked calls to take large short positions this morning in an attempt to drive the prices lower before covering. This typically can allow for 2%-3% swings on a day like today.
All of the major index futures reacted negatively to disappointing news from D.C. on Thursday evening, falling more than 1.5% after 8pm EST. By 3 a.m. EST they had recovered slightly but still remained significantly lower as we head into tomorrow's pre-market action.
I expect all of the indexes to open approximately 1% lower tomorrow as the shorts begin to initiate their positions. Given the extreme caution surrounding this fiscal cliff, I doubt the bulls will have enough positive momentum to beat out the bears early in the day. I do believe however we can expect to see a sharp rise going into the final hour before the market closes. I base this option on the fact that next week holds potential for both a "Santa Claus rally week" as well as a possible cliff resolution. This would grant those who are willing to hold out a very happy new year.
What does this mean for you as an investor?
Long-term investor: Not much. This is a short term opportunity for the options traders playing with volatility swings and straddles. Hang in there as this action will most likely wash out by the beginning of next week.
Short-terms options play: Good luck with your picks, as tomorrow will make many of us winners and many of us losers. If you feel like gambling, I expect to see the most volatility to occur in following 10 positions.
- Bank of America (NYSE:BAC)
- Apple, Inc (NASDAQ:AAPL)
- Citigroup, Inc (NYSE:C)
- Netflix, Inc (NASDAQ:NFLX)
- Caterpillar, Inc (NYSE:CAT)
- Research In Motion (RIMM)
- Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX)
- Financial Select Sector SPDR (NYSEARCA:XLF)
- Facebook, Inc (NASDAQ:FB)
- Allscripts Healthcare Solutions (NASDAQ:MDRX)
Disclosure: I am long BAC, CAT, C, FCX, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.