Quadruple-witching may stir US stocks Friday
Tuesday December 16, 2:26 pm ET
By Doris Frankel
CHICAGO, Dec 16 (Reuters) - Wall Street could be headed toward increased volatility and volume this Friday as investors rush to adjust their positions during "quadruple-witching" -- when four different types of options and futures contracts expire.
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The so-called witching hours for stock options, index options, index futures and single-stock futures occur each quarter on a Friday.
The event could spark sudden spikes and dips in the stock market when December derivative contracts stop or settle at different times, as some investors either exercise positions or roll them forward at the last minute.
Jon Najarian, chief market strategist with PTI Securities.com. noted some volatility could result from a number of outstanding equity options contracts in the technology sector which have not yet been exercised.
An equity option gives the holder the right to buy or sell a stock at a predetermined price within a set period of time.
"The potential driver for volatility are these at-the-money calls or puts that have extremely large open interest, such as Intel Corp. (NasdaqNM:INTC - News) and Microsoft Corp. (NasdaqNM:MSFT - News; options), and traders have the option to exercise them at the very last minute or let them expire worthless," Najarian said.
For example, if an investor sold at-the-money options contracts, he would have to cover the potential long or short stock positions, which would create buying or selling pressure in the underlying stocks, said Peter Dunay, chief market strategist at Wall Street Access.
An at-the-money option has an exercise price that is equal to the current market price of the underlying stock.
But, at the end of the year, many players are taking profits on some of the best-performing stocks to lock in gains before quadruple-witching, said Tim Biggam, chief options strategist with Man Securities.
"The recent intraday swings in the overall stock market have allowed traders to unwind their positions early this week," Biggam said.
Most December index options and index futures, such as those on the Standard & Poor's 500 (CBOE:^SPZ - News) index, cease trading on Thursday and settle at Friday's opening.
Options contracts on the S&P 100 (CBOE:^OEX - News) index stop trading on Friday afternoon, while individual December stock options cease trading at Friday's close.
A fourth ingredient to the brew is single-stock futures, which made their U.S. debut in November 2002.
At OneChicago and NQLX -- the two electronic exchanges that offer futures on individual stocks -- December single-stock futures close and settle by the end of Friday.
OneChicago offers 94 single stock futures and 15 Dow Jones Microsector index futures, while NQLX lists 66 securities futures products.
Single-stock futures are contracts that allow investors to buy or sell 100 shares of an individual stock at a certain price on a set future date.
But some traders do not see major volatility in that product because many players had rolled over their positions as early as last week.
"On Dec. 10, OneChicago traded a record 243,198 securities futures, and that was primarily a roll from the expiring December contracts out into the January and other 2004 monthly cycles," Najarian said.
