The goal of this article is to provide information about how option and futures contracts trading could influence stocks and indexes without meaningful change in fundamentals.
Do you see any relationship between S&P 500 corrections and Quadruple Witching date?
I believe in the past 18 months 5 out 6 Quadruple witchings had meaningful relationship 3 of them is very obvious!
What is "witching" and why is it quadruple?
In folklore, the "witching hour" is a supernatural time of day when evil things may be afoot. In derivatives trading, this has been colloquially applied to the hour of contract expiration, often on a Friday at the close of trading. On quadruple witching, four different types of contracts expire simultaneously: listed index options, single-stock options, index futures, and stock futures.
When does quadruple witching occur?
Quadruple witching usually occurs on the third Friday of March, June, September, and December, at market close (4:00 pm EST).
Why do traders care about quadruple witching?
Because several derivatives expire at the same moment, traders will often seek to close out all of their open positions in advance of expiration. This can lead to increased trading volume and intraday volatility. Traders with large short gamma positions are particularly exposed to price movements leading up to expiration. Arbitrageurs try to take advantage of such abnormal price action, but doing so can also be quite risky.
What are some price abnormalities observed on quadruple witching?
Because traders will try to close or rollover their positions, trading volume is usually above average on quadruple witching, which can lead to greater volatility. However, one interesting phenomenon observed is that the price of a security may artificially tend toward a strike price with large open interest as gamma hedging takes place. This can lead the price to "pin" the strike at expiration due to this sort of trading activity. Pinning a strike imposes pin risk for options traders, where they become uncertain whether or not they should exercise their long options that have expired at the money, or are very close to being at the money. This is because, at the same time, they are unsure of how many of their similar short positions they will be assigned on.
Conclusion:
We can use this data to find the seasonality of the market! This could help us make better decisions especially in the weeks leading to Quadruple witching.
moshkelgosha
Reference Article:
https://www.investopedia.com/terms/q/quadruplewitching.asp
Do you see any relationship between S&P 500 corrections and Quadruple Witching date?
I believe in the past 18 months 5 out 6 Quadruple witchings had meaningful relationship 3 of them is very obvious!
What is "witching" and why is it quadruple?
In folklore, the "witching hour" is a supernatural time of day when evil things may be afoot. In derivatives trading, this has been colloquially applied to the hour of contract expiration, often on a Friday at the close of trading. On quadruple witching, four different types of contracts expire simultaneously: listed index options, single-stock options, index futures, and stock futures.
When does quadruple witching occur?
Quadruple witching usually occurs on the third Friday of March, June, September, and December, at market close (4:00 pm EST).
Why do traders care about quadruple witching?
Because several derivatives expire at the same moment, traders will often seek to close out all of their open positions in advance of expiration. This can lead to increased trading volume and intraday volatility. Traders with large short gamma positions are particularly exposed to price movements leading up to expiration. Arbitrageurs try to take advantage of such abnormal price action, but doing so can also be quite risky.
What are some price abnormalities observed on quadruple witching?
Because traders will try to close or rollover their positions, trading volume is usually above average on quadruple witching, which can lead to greater volatility. However, one interesting phenomenon observed is that the price of a security may artificially tend toward a strike price with large open interest as gamma hedging takes place. This can lead the price to "pin" the strike at expiration due to this sort of trading activity. Pinning a strike imposes pin risk for options traders, where they become uncertain whether or not they should exercise their long options that have expired at the money, or are very close to being at the money. This is because, at the same time, they are unsure of how many of their similar short positions they will be assigned on.
Conclusion:
We can use this data to find the seasonality of the market! This could help us make better decisions especially in the weeks leading to Quadruple witching.
moshkelgosha
Reference Article:
https://www.investopedia.com/terms/q/quadruplewitching.asp
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