Friday, June 19, 2009

The Work of the Witch

Anyone watching Bloomberg television today knows that today is what is called a quadruple witching session. This is just market lingo for an event that happens only four times a year. Quadruple witching, which occurs on the third Friday in March, June, September and December, is the day that sets off expiration for stock index futures, stock index options, stock options and single stock futures. The expiration takes place during the last hour of the trading day, and while there is nothing spooky about contracts expiring, it is the simultaneous expiration of derivatives that causes traders to cover and re-set positions, and is known to exacerbate volatility on these days. So if you happen to notice a dramatic turn up or down in the markets at the end of the day today, there may be no need to read too much into the market action of the day. Four times a year you might just attribute extreme volatility to the work of the witch.