Fisher Investments Editorial Staff
US Economy

Witching Hour

By, 06/22/2009

Story Highlights: 

  • An event known as "quadruple witching" took place on Friday.
  • Quadruple witching refers to the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures.
  • This confluence of derivative expirations can have a short-term impact on stock prices, but the effects dissipate before long.
  • Long-term investors can confidently disregard these brief market moves.

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Most investors were probably unaware of a ghoulish event that took place Friday known as "quadruple witching." It might seem odd to invoke broom-riding hags so far from Halloween, but this phenomenon has little to do with black cats or boiling caldrons of potion. Quadruple witching refers to the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures. While none of these vehicles are themselves stocks, their values are all tied to stocks or stock indexes, so their expiration can have a meaningful albeit short-term impact on stock prices.

Quadruple witching occurs four times per year on the third Friday in March, June, September, and December. Prior to 2002 when single stock futures began trading, "quadruple witching" was known as "triple witching," a term still used by many investors. The ominous title is perhaps a reference to the witches in Shakespeare's MacBeth and is intended to conjure images of spells being cast over the market. These so-called spells have been known to stoke market volatility in individual stocks, specific sectors, or even the overall market or increase trading volume as traders buy and sell stocks to offset options or futures positions, or take advantage of arbitrage opportunities. And since derivatives tied to the categories of stocks that have moved the most are likely to have the most intrinsic value, the effect of quadruple witching are often seen most in these categories. 

But don't make the mistake of thinking navigating around this very short-term volatility is a worthwhile endeavor. Once the derivates expire, these positions are typically unwound with little if any lasting impact. The effects are always fleeting, and normal stock market trading patters invariable return before long. Long-term investors shouldn't fret market moves resulting from quadruple witching any more than they should fear goblins or bogeymen. It won't take long for wonky market moves resulting from quadruple witching to dissipate.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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