Friday's Quad Witching Explained

Mar. 18, 2010 11:10 PM ETSPY, DIA, SDS, SPXU1 Comment
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Born in Louisville, KY, TraderRob learned to be industrious from a young age. Taking notes from his father’s entrepreneurial spirit, he grew up into the residential home building market to witness supply, demand, price and wages influence behavior at a basic level. He first tasted a passion for studying the economy during his participation in the National Fed Challenge Competition. The competition demanded a thorough crash course in interpreting economic fundamental data and understanding FOMC policy. He attended Clemson University and graduated with a B.S. in Management and a Minor in Economics. After beginning his career in residential contracting, he turned towards his true passions of global market research, analysis and trading. He is a perpetual student of the economy and global markets with a passion for discerning what drives economic activity and market behavior. TraderRob has been studying and trading markets for nearly ten years with a passionate yet calculated edge. He is hungry for criticism and will readily engage in any fellow trader.

Unknown-Little-old-ladies-dressed-as-witches-drinking-tea-53720What is Quad Witching?

Generally there's a great deal of confusion concerning the term "quad witching" and what this day may constitute in financial markets. As a result, we would like to take this Quad Witching Friday, March 19, 2010, and demystify the phenomenon once and for all.

"Witching" signifies the expiration of an entire group of derivative or futures financial vehicles.  While usually void of economic indicators, the "Quad Witching" Friday is assuredly more volatile, as financial markets antiquate the time value of derivative contracts leading into expiration.

"Quad Witching" is a term used to describe the expiration of Stock Index Futures, Stock Index Options, Individual Stock Futures, and Individual Stock Options contracts.

Triple and Quadruple Witching days are generally synonymous with high trading volume and volatility, due to contracts expiring and the calling in of contract obligations to be honored. Many derivatives hold certain values based on expectations concerning the value of the underlying security and the length of time until expiration. This causes many losing positions to be covered in a hurry when the strategy goes bust and large numbers of shares to trade hands as prices swing through wide ranges. 

More complicated factors such as Delta, a derivative of options contracts, representing the time until expiration, are also traded and constitute additional positions which must be closed on a Quad Witching day.

Alas, it becomes clear why the talking heads on business television and traders on the floor expect anything other than "business as usual" on a "witching" day.

Disclosure: Disclosure: No Positions

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