Quadruple Witching Unleashed: How Expiration Chaos Shakes up Major Markets
As quadruple witching occurs on the third Friday of March, June, September, and December, and it refers to the simultaneous expiration of stock options, stock index options, stock futures, and stock index futures. It can lead to increased market volatility and trading volume as traders unwind or adjust their positions. Here is how it affects major markets:
Increased Volatility: As options and futures expire, investors and institutions rebalance portfolios, hedge positions, of close out contracts, causing rapid price swings in stocks and indices like the S&P, Nasdaq, and Dow Jones.
Higher Trading Volume: The need to roll over futures contracts or exercise options results in a surge of trading activity, often concentrated in the final hour. However, this volume surge often carries over into the following week due to positions being assigned to option traders who sell options that have gone in-the-money on expiration day.
Arbitrage Opportunities: Discrepancies between futures, options prices and underlying assets attract arbitrageurs, which can amplify price movements.
Impact on Broader Markets: Since index futures and options are tied to major indices, quadruple witching can influence the overall direction of the equity markets, sometimes exaggerating bullish or bearish trends.
While quadruple witching does not always cause major disruptions, its effects are most pronounced in markets that are already experiencing high uncertainty and/or significant economic data releases. The markets are already on edge with the war between Israel and Iran and this week we have a batch of economic data that is going to be released, which could add to the kind of uncertainty that might cause a volatility spike.
Data to be released this week:
Monday June 23rd(9:45 am ET)
Services PMI
Manufacturing PMI
Tuesday June 24th
Housing Price Index (9am ET)
Consumer Confidence (10am ET)
Wednesday June 25th
New Home Sales (10am ET)
Crude Oil Inventories (10:30am ET)
Thursday June 26th (8:30am ET)
Final GDP q/q
Unemployment Claims
Durable Goods
Goods Trade Balance
Prelim Wholesale Inventories m/m
Pending Home Sales (10am ET)
Friday June 27th (8:30am ET)
Core PCE Price Index m/m
Personal Income m/m
Personal Spending m/m
So, from the lineup of data due to come out this week, particularly on Thursday and Friday, it should not be a surprise to see a rally in the VIX. The technical signals are already showing bullish signals for the VIX on the weekly candles, question is….How high will it go?
Weekly Candle Chart of the CBOE Volatility Index
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