Quadruple Witching Day is upon us, so don't be surprised if the market gets pretty hairy in the last hour of trading.
And don't fret, either.
No, Quadruple Witching isn't the tag line to the fourth sequel of The Blair Witch Project. Rather, it's a day on which contracts for four derivative products -- stock index futures, stock index options, stock options and single stock futures -- all expire at once.
It happens on the third Friday of every March, June, September and December, and to most retail investors, it's no big deal, seeing as they probably shouldn't be shooting craps with futures and options contracts, anyway. So if you have no skin in that game, don't let the market's crazy movements put you in a bad mood this weekend. It really has no implication for your 401(k), 529 plan, personal portfolio -- or even Monday's action.
"This is just a lot of noise that doesn't affect any sort of longer term trend," says Keith Hembre, chief economist at U.S. Bancorp's (USB) FAF Advisors in Minneapolis. "It represents indiscriminate buying and selling based on contractual considerations -- not fundamental ones."
For a bit of quick background, options are just contracts that give the bearer the right -- but not the obligation -- to buy or sell some asset at a certain price on or before a certain date. Futures are similar but more restrictive in that they require the holder to buy or sell at set price by a set date. Options and futures are derivatives because they "derive" their value from some underlying asset, such as stock.
Anyway, Quadruple Witching does create a lot of volatility, especially in the last hour of trading, because market professionals must rapidly buy and sell their expiring contracts in order to book gains, cut losses and make new bets.
Just take a look at the VIX (VIX). Officially known as the Chicago Board Options Exchange Volatility Index -- but more commonly called the "investor fear gauge" -- the VIX jumped as much as three percent in early Friday trading as punters placed bets that the S&P 500 (INF) would get bipolar at some point before market close.
The bottom line? Don't let any frenetic Friday action ruin your weekend. That is unless you hold lots of futures and options, in which case we have this piece of advice: Stop reading this post and get back to your trading screen, dummy.
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