To The Moon

Quadruple Witching Day is one of the most important events in the stock market as it always witnesses heavy trading volume and makes the market highly volatile compared to normal days.

On the Quadruple Witching Day, four kinds of derivatives - stock options &futures; index options & futures - expire on the same day.  There are 4 Quadruple Witching Day in a year, respectively in the 3rd Friday of last month every quarter.

1.Heavy trading volume due to frequent transactions

Different from trading stocks, futures and options have a special time parameter. So traders often seek to close their open positions in advance of expiration.

If investors want to keep a position through quarterly expiration, they must sell the expiring contract and buy into the newer contract, which is called“rolling”.

Therefore, on this day, many contracts will be closed or newly opened, making the transaction volume higher than normal.

2. How did stock market performed on the quad witching day?

In the past 3 quad witching days in 2022, the 3 major indices $S&P 500(.SPX)$ ,$NASDAQ(.IXIC)$ , and$DJIA(.DJI)$ had a 2/1 chance of going up and down. 

Chart made by Wallstreet_Tiger

How will Friday Perform?

Charlie McEllicott, cross asset strategist of Nomura Securities International, said that Thursday's sell-off in US equities sent the $S&P 500(.SPX)$ index down to a level that may be bearish for some types of rule-based investors,

as the S&P 500 index closed down 2.49% at 3985.75 on Thursday, traders who made macro bets in the futures market may turn into sellers. Nomura's model shows that if the index closes below 3933, large fund managers may be forced to abandon their previous bullish stance, and the probability of being short is as high as 83%.

McEllicott estimated that when the S&P 500 index fell more than 2% in a single day, these systematic funds might need to sell $30 billion of global stock futures, of which about $11 billion came from contracts linked to the S&P 500 index. McElligott said:

The decline in spot prices of US stocks has brought the market close to some considerable potential 'sell/deleverage' trigger points, the panic selling of these quantitative funds may be imminent.

3. Santa Rally Gone or Still Possible?

The Federal Reserve deflated what hope remained for a Santa Claus rally and reinforcedthe view that the market will test or even break its lowsin the first half of the new year.

Selling in stocks accelerated Thursday, with the $DJIA(.DJI)$  down 2.3% at 33,202, and the$S&P 500(.SPX)$ closing off 2.5% at 3,895. Treasury yields, which move opposite price, declined, with the benchmark 10-year Treasury yield falling to 3.45%.

“Every single statistic the Fed changed yesterday was equity market bearish. Period,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI.

Sam Stovall, chief market strategist at CFRA said

the market could see a slight Santa rally at the end of the month, going into the beginning of January. He said the average gain for the traditional rally in the final five sessions of December and the first two trading days of the new year is 1.3%.

Emanuel of Evercore ISI said,

my current market strategy is to play defense within the stock market, and he expects stocks could stage a slight Santa rally right at the end of the year. I expects a retest of the lows some time in the first half. We were overweight financials. We took that off and substituted it with consumer staples.”

More info and discuss, please join :After Hawkish Decision , Santa Claus Rally - Fact or Fiction?

4. Arbitrage Opportunities and Risks

Quadruple witching may provide arbitrageurs the opportunity to profit on temporary price distortions.

You may be fortunate or unfortunate to buy equities or options, futures at a unreasonable price because the high volatility may make investors irrational.

Investors focused on short-term investing should be ware of quad witching day and make sure you have enough margin.