CHICAGO – It used to be called "triple-witching," the scary Friday once a quarter when Wall Street braced for volatility as equity options, stock index futures and stock index options all expired on the same day.
This Friday will be the first "quadruple-witching" when new single-stock futures are added to the concoction.
Wall Street traders said the coming expirations were already adding volatility to stock trading Thursday.
Most December stock index options and some index futures, such as the Standard and Poor's 500, ceased trading on Thursday and settle on the Friday opening. Options contracts on the S&P 100 index close on Friday. Individual stock options stop trading and settle at Friday's close.
But traders do not expect single-stock futures expirations to have much impact because volume in the new market is still small. 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.
"In this upcoming expiration, single-stock futures will probably not have an impact in the volatility mix because the volume is still insignificant compared to other markets," said Steve Sanders, vice president for marketing and business development at Interactive Brokers Group, a global electronics brokerage firm.
Triple-witching first became a scary time for Wall Street in the early 1980s when trading took off in equity futures and options. The simultaneous expirations might have caused some wild gyrations in prices as traders rushed to close out or roll over positions, sometimes affecting underlying stock prices and the market.
"At that time, the equity markets were less volatile and when volatility did show up during the quarterly expiration, it became more noticeable," said Dave Lerman, associate director of index products at the Chicago Mercantile Exchange.
By the late 1990s, the nervousness around triple-witching faded as Wall Street got used to increased volatility due to the bull market and the technology boom.
"With Internet stocks doubling and tripling in value in a couple of weeks, not a lot of people would notice the volatility associated with a quarterly expiration," Lerman said.
In recent years, investors have devised ways to cope with the triple-witching phenomenon.
"In the past few quarters, investors have not waited for the last minute and have adjusted their portfolios the week prior to expiration," said John Person, head financial analyst with Infinity Brokerage Services.
Diane Garnick, a global investment strategist with State Street Global Advisors, said triple-witching gives a sense of where stock market sentiment is.
For example, if investors were betting the stock market was going to go higher, they would need to sell their long December stock index futures positions and buy March positions before Thursday's close.
"But what adds to the volatility is Thursday's deadline, because investors need to adjust or roll over their positions or risk being subjected to the cash settlement value of the underlying futures contract which is assigned on Friday morning," Person said.
On Nov. 8, trading in futures on individual stocks such as Microsoft Corp. began on OneChicago LLC, a consortium of three Chicago derivatives exchanges, and on rival venture Nasdaq Liffe Markets LLC.
Although volume in single-stock futures has gained momentum after a full month of trading, many players are still on the sidelines as they wait for liquidity to build.
"It will probably take a few more months before I even have interest," said George Fontanills, president of Optionetics.com, an options education firm. "Larger institutional traders are going to need volume to get into and out of the trade."
As of Dec. 17, a total of 248,546 contracts had changed hands on the two electronic exchanges since trading began, according to the Options Clearing Corp.
At OneChicago and Nasdaq Liffe, December futures contracts close and settle on Friday with physical delivery scheduled for Dec. 26.
Nasdaq Liffe, a venture between the Nasdaq stock market and the London International Financial Futures and Options Exchange, lists December futures on 30 stocks and four exchange-traded funds.
One Chicago, an alliance of the Chicago Board of Trade, Chicago Mercantile Exchange and Chicago Board Options Exchange, offers December futures on 43 stocks and one exchange-traded fund.