What is Quadruple Witchcraft and when is Quadruple Witchcraft Day?


  • The Quadruple Witch is the buzzword among equity traders this week.
  • But what is it and how will it affect the stock markets?
  • What are the key dates to watch for when options expire?

Quadruple witchcraft is the buzzword for the stock markets this week as a slew of derivative contracts expire this week due to the September quarterly expiration.

How we got to quadruple on witchcraft day

Futures contracts traditionally expired in March, June, September and December. Initially, futures developed as commodity futures, which helped traders to hedge the price of commodities such as pork belly, cotton, orange juice. This gradually spread to financial futures as speculators began to trade in futures, and futures exchanges launched new contracts to take advantage of growing demand from speculators. Financial futures are now among the largest in the world, and futures on major stock indexes are estimated to far exceed the underlying volume on the exchanges and determine the price rather than the stock market itself. same.

Futures contracts were to expire on the third Wednesday of the month, but with the introduction of options contracts on these futures contracts, these were to expire two Fridays before the third Wednesday on dates known as the international money market ( IMM). Finally, all the dates have been brought together for stock market derivatives to streamline things leading to a day with multiple expirations. The expiration is at the close of the market. What we have now are four expirations: simple stock options, simple stock futures, index futures, and index options. Triple witchcraft was a precursor, as individual stock options were not introduced until the turn of the millennium.

Simple equity futures are legally binding contracts to buy or sell an underlying stock on a specific date, known as the expiration date. An index futures contract is slightly different because you don’t take delivery of the underlying basket of stocks of the index, but instead settle the difference between your purchase price and the expiration price, which is called cash settlement.

How does quadruple witchcraft impact the stock market?

That’s the big question, and minds much greater than mine have found the answer to this question by using computers and powerful algorithms to try to take advantage of it. What is generally accepted is this volume and, therefore, the volatility increases quite sharply on the day of the quadruple witchcraft. There are many reasons, but many have to do with market makers trying to hedge their positions up front and flatten their trading book. Gamma is a word that has become quite fashionable lately with gamma compression making its way into the language of traders. Gamma is the change in the hedged position of an options market maker (called a delta). If you buy a call option from a market maker, the market maker will likely buy the underlying asset to fully or partially hedge the position, depending on their accounting positions. So far so easy when it comes to a stock. You buy an AMC call option. The market maker is now short on the call option, so they are buying AMC shares to hedge.

However, when it comes to a stock index, the situation becomes more delicate. You buy a Tesla call option, so now the market maker is running out of Tesla calls and therefore basically running out of Tesla shares. He can buy Tesla shares for hedging, but Tesla is a member of the S&P 500 Index, so traders of S&P 500 futures and options from the same bank / broker may have positions that require hedging. in which Tesla is just one of the 500 stocks they need. buy or sell to hedge. If you buy the SPY or S&P 500 futures, a broker / market maker can hedge the position, manage the position, or hedge the top few stocks in the index such as Apple, Amazon, Facebook, Microsoft and Tesla. . These five stocks represent 20% of the index.

Why are the days of quadruple witchcraft so complex?

A broker will therefore have extremely complex and potentially interconnected systems that will analyze all arbitrage positions in real time and provide perfect coverage. There is no point in a broker buying Tesla to hedge their options position if another trading desk of the same broker has to sell Tesla short as part of a basket linked to S&P 500 futures or options. It becomes difficult to explain and even more difficult to trade and calculate. Believe me, I’ve been doing this for 20 years! There are also regulatory issues, which means that a trading desk within one bank may need to be completely separate from another. Sometimes one desk can be Tesla short and another long without realizing it. Suffice it to say that figuring out what will happen then on the day of the quadruple witchcraft is the business of quantitative traders and the black box, and even most of them struggle with complexity.

Just watch out for potentially large volume spikes and price spikes for no apparent reason. A general observation over the years is that the week following the quadruple witchcraft tends to be quieter than normal, and prices have a slightly higher historical precedent of falling as demand for hedging has been reduced. The time is once again on the side of the market makers, who still have three months before they panic and start hedging again!

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