How Quad Witching Days Affect FX Markets
The third Friday at the end of every quarter sees multiple options and futures contracts expire at the same time. This can cause skewed volatility across various asset classes.
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We have a quick question here from Wocheck asking us to elaborate a little bit more on the term quad witching day. And says, always Wocheck thanks for the question.
As you know, there are various ways that you can trade individual stocks and equity indices. You can either trade them as a CFD through your broker, but you could also trade them of course as a option with an options contract or a futures contract.
Now, the difference between trading a CFD and trading it as an optional futures contract is that options and futures contracts expire. So for stock options and equity index options, they usually expire the third Friday of every month, but once a quarter, so that'll be at the end of March, at the end of June, at the end of September, and the end of December, on that third Friday, you also have stock futures and equity futures, expiring on the same day.
Now because you have so many options and futures contract expiring all at the same time, it can often result in very choppy price action, with some exacerbated moves to the upside, to the downside.
Now, there is usually a noticeable increase in the volume on these days because market participants will need to decide whether they will roll the futures contract over and maintain that position in a non-expiring contract. So, going from the June contract to the July contract, for example, or they can choose to completely close out the futures positions, which can be a buy or a sell depending on the direction of the original trade.
So why is this important for us as currency traders? Well, it's important from a riskflow point of view. So if we see exacerbated price moves in risk assets like equities and stocks, we can of course expect some spillover effects into the high betas as well as the safe haven currencies from risk sentiment point of view.
So definitely something to keep in mind. And also keep in mind that the challenge of these types of days is, you know, it's kind of like fishing. You're trying to catch fish by shooting them with a shotgun. So eventually, you'll probably get lucky and catch something but for the most part, you're shooting blind, you know, and there's no way of really knowing which way the price will go. So it's a little bit of a hit and miss trying to trade them.
And then of course, if you throw in, you know, potential short-term risk things that have catalysts into the mix, it can really be a very messy picture overall. So generally speaking, your biggest reactions from these quad witching days will occur at the year end or the December one. At the December expiries of course, traders will look to square and square out positions going into the year end and to try and square off their books, but depending on the overall flow of the markets any quarter has the potential to see big moves.
So in today's session, for example, we can see some analysts are citing that there's almost 1.8 trillion SMP option contracts, or $1.8 trillion worth of SMB option expiring contracts or options that need to expire, which makes it one of the largest mid-year explorations on record. But at the same time, you can see that there's very little open interest. And open interest is within 10% of the stop-spot price.
So it's big, but it might not be that big of an influence in the market. So we'll need to wait and see what happens. So these days don't necessarily always translate into big moves.
And as some of those positions can, of course, like probably in this case, can already be squared or rolled over a week or a couple of days, or maybe a couple of hours before the actual expiry takes place. But that should give you an overall view, Wocheck, of what we mean with quad witching day and how we can affect the overall flow in the market.
Any other questions as always, don't hesitate to let us know.
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If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
----
We interpret and explain price moves in real-time, 24 hours a day. Our team of analysts produce text, video and audio commentary.
You understand the markets and trade with confidence. Learn more at our website here: https://bit.ly/2HFykNd
-----
We have a quick question here from Wocheck asking us to elaborate a little bit more on the term quad witching day. And says, always Wocheck thanks for the question.
As you know, there are various ways that you can trade individual stocks and equity indices. You can either trade them as a CFD through your broker, but you could also trade them of course as a option with an options contract or a futures contract.
Now, the difference between trading a CFD and trading it as an optional futures contract is that options and futures contracts expire. So for stock options and equity index options, they usually expire the third Friday of every month, but once a quarter, so that'll be at the end of March, at the end of June, at the end of September, and the end of December, on that third Friday, you also have stock futures and equity futures, expiring on the same day.
Now because you have so many options and futures contract expiring all at the same time, it can often result in very choppy price action, with some exacerbated moves to the upside, to the downside.
Now, there is usually a noticeable increase in the volume on these days because market participants will need to decide whether they will roll the futures contract over and maintain that position in a non-expiring contract. So, going from the June contract to the July contract, for example, or they can choose to completely close out the futures positions, which can be a buy or a sell depending on the direction of the original trade.
So why is this important for us as currency traders? Well, it's important from a riskflow point of view. So if we see exacerbated price moves in risk assets like equities and stocks, we can of course expect some spillover effects into the high betas as well as the safe haven currencies from risk sentiment point of view.
So definitely something to keep in mind. And also keep in mind that the challenge of these types of days is, you know, it's kind of like fishing. You're trying to catch fish by shooting them with a shotgun. So eventually, you'll probably get lucky and catch something but for the most part, you're shooting blind, you know, and there's no way of really knowing which way the price will go. So it's a little bit of a hit and miss trying to trade them.
And then of course, if you throw in, you know, potential short-term risk things that have catalysts into the mix, it can really be a very messy picture overall. So generally speaking, your biggest reactions from these quad witching days will occur at the year end or the December one. At the December expiries of course, traders will look to square and square out positions going into the year end and to try and square off their books, but depending on the overall flow of the markets any quarter has the potential to see big moves.
So in today's session, for example, we can see some analysts are citing that there's almost 1.8 trillion SMP option contracts, or $1.8 trillion worth of SMB option expiring contracts or options that need to expire, which makes it one of the largest mid-year explorations on record. But at the same time, you can see that there's very little open interest. And open interest is within 10% of the stop-spot price.
So it's big, but it might not be that big of an influence in the market. So we'll need to wait and see what happens. So these days don't necessarily always translate into big moves.
And as some of those positions can, of course, like probably in this case, can already be squared or rolled over a week or a couple of days, or maybe a couple of hours before the actual expiry takes place. But that should give you an overall view, Wocheck, of what we mean with quad witching day and how we can affect the overall flow in the market.
Any other questions as always, don't hesitate to let us know.
-----
If you find this content helpful, you’ll love Forex Source.
There’s a link below were you can learn more about it
https://bit.ly/2HFykNd
