All you want to know but never asked about the stocks and options markets.

martes, 9 de febrero de 2016

Quadruple witching

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Unlike what happens with the stocks that have an indefinite life (except in exceptional cases of bankruptcy, liquidation, merger ...), other financial instruments have a predetermined maturity period. This applies, for example, for derivatives (futures and options).

Every three months, coinciding with the third Friday of each end of the quarter (March 20, June 19, September 18 and December 18 of 2016), occurs the expiration of index futures, index options, stock futures and stock options. These four days have a peculiar name, the "quadruple witching".

At this time, investors should take the decision to close the position they have open, or do what is called "roll over", which is to transfer the open position to the next maturity. To make the so-called "roll over" the investor simply sold the position before the expiration date and simultaneously buy the same position.

At this time it tends to increase the trading volume of the market and many wait until the last few days to decide whether to close the position or not, and this increased trading volume usually comes hand in hand with an increase in volatility.

It is called "witch", because it can make the market trend completely change its direction in a"magic or no cause" manner. Although there is indeed a simple explanation, which is that there is a much greater trading volume in the day, which can cause sudden changes in trend.

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