Triple Witching Friday…..what a scary term! Is it the day after Halloween? NO. Is it a hazing ritual for a college fraternity? Not even close.
Well then, what is it ?
It is an event that takes place when stock index futures, stock index options and stock options all expire on the same day. Triple witching days occur four times a year on the third Friday of March (March 20th next month), June, September and December. It is believed that the term triple witching originates from the three witches in Shakespear’s play Macbeth. This phenomenon is oftentimes referred to as freaky Friday. More recently, single stock futures have been added to the traders arsenal and these securities also expire on the same four dates thereby giving birth to the term Quadruple Witching Friday. Because investors attempt to unwind (close out) their positions prior to contract expiration, the market can be particularly chaotic and unpredictable. Market volatility and trading volume is enhanced. The last hour of these trading days, from 3:00 to 4:00 PM EST, is referred to as Quadruple Witching Hour.
Quadruple Witching Components:
1- Stock Options: A call or put option on a single stock.
2- Index Options: A call or put option on a financial index like the S&P 500.
3- Single Stock Future (SSF) : A futures contract with an underlying of one particular stock, usually in batches of 100. There is NO transmission of share rights or dividends.
4- Index Futures: A futures contract on a financial index.
Futures versus Options Contracts:
Covered call writers sell call options and are familiar with options contracts. Let’s define Futures or Futures contracts:
A financial contract OBLIGATING the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity (like gas, oil or corn) or a financial instrument, at a predetermined date and price. Some may require the physical delivery of the asset, others are settled in cash. These markets are highly leveraged compared to stock markets. The main difference between options and futures is that options give the holder the right, but not the obligation, to buy or sell the underlying asset on or before expiration, while the holder of a futures contract is obligated to fulfill the contract terms.
Quadruple or Triple Witching Fridays create increased volatility due to greater trading volume and price fluctuations. This is similiar in nature to the effect that earnings reports have on equity prices. Volatility means risk and we, as Blue collar investors do everything necessary to avoid risk. Now, I’m not suggesting that we stop selling options four months out of the year. However, would it not make sense to opt for a higher percentage of I-T-M strikes during these months to garner the additional downside protection we may need if that volatility causes our shares to head south? In last week’s article, entitled Selecting the Best Strike Price, I spoke about laddering of strikes. Whenever a contract period ends with a Quadruple Witching Friday, I tend to have a higher percentage of I-T-M strikes then O-T-M strikes.
Last Weeks Economic News:
As promised, President Obama has hit the ground running regarding the economy. Congress reached an agreement on and passed the economic stimulous bill geared to creating or saving 3.5 to 4 million jobs. The Treasury Department introduced its new bank-rescue plan. This initiative has three prongs:
1- Inject capital into certain banks.
2- The FDIC will establish a Public-Private Investment Fund of $0.5 tillion to $1.0 trillion to invest in banks’ bad loans and other troubled assets.
3- Commit another $1.0 trillion to support a Consumer and Business Lending Initiative targeted to small businesses, consumers, and auto-finance loans, as well as commercial mortgages.
In addition to this mega-news, the trade deficit narrowed by 4.0% and January retail sales increased by 1.0% from the disappointing December figures, for its first gain in seven months.
For the week, the S&P 500 declined 4.8% for a year-to-date return of -8.1%.
Industry in the Spotlight- STEEL:
One of the things I do to maximize my profits is to be on the alert for up and coming industries. These are groups that have been out of favor but making a big comeback. The market is cyclical, stocks are cyclical and so are their industries. Over the past few months I have mentioned Schools, Gold, Security and Coal as some of the industries falling in favor with the institutional investors. Today I am highlighting the Steel Industry. Although the technical grade of this group is a D, new institutional dollars have been flowing into these stocks for the past few months. Currently this group is ranked in the 92nd percentile in terms of new institutional money flowing in. Below is a chart of this industry wherein you can clearly see a rebounding group:
Three of the better performers in this industry are STLD, NUE, and SID. Although these equities do not meet our system criteria at this time, I plan to keep a close eye on them, and much like President Obama, hit the ground running when they do.
Note: Thanks to all for your kind emails regarding the calculations I started to provide on the comments link of these articles. I will continue to post at least one per week of both initial option sales and/or exit strategy calculations. Bear in mind that the ESOC will do these for you, but understanding the thought process behind the math will make us all better and more savvy investors.
Regards to all,
To join my mailing list:
To access my complete product line: