The day of the four witches, origin of the name and consequences on the markets

Today it is the so-called “Day of the Four Witches”Even if the explanation of this event has nothing to do with the supernatural. In short, the “Freaky Friday“, As it is defined on the other side of the Atlantic, is the moment in which futures contracts on indices and shares as well as those relating to options (always with underlying indices and equities) are found to expire – at the same time. .

The event is therefore quite rare as the simultaneous expiration of all four contracts occurs only on the third Friday of the month at the end of each quarter. As a result, this particular alignment between derivatives maturities will occur four times a year and on the third Friday of March, June, September and December respectively.

In fact, only from November 2002 did the current name replace the previous one “Day of the Three Witches”And that is since futures with underlying equities were also introduced.

We remind you that futures are derivative contracts regulated by a clearing house and traded on a stock exchange in which two parties agree to buy (sell) an underlying (indices, shares, commodities) at a pre-agreed price at a certain future date.

Options, on the other hand, allow the holder of the contract to have the right, but not the obligation, to buy (call option) or sell (put option) a certain underlying at a predetermined price at the expiration of the contract (there is only a slight difference between the options defined as “American”, where the option right can be exercised for the entire duration of the contract, and the “European” ones where the option right can only be exercised on the expiry date).

The origin of the name

Wall Street traders are known to like to give very particular – and sometimes strange – nicknames linked to certain events that take place in the tumultuous world of finance. Thus we have the “sell in may and go away” (hypothetical sales period that occurs in the period of May) or the “dead cat rebound” (when the prices of a financial asset show a short-term upward trend after a sharp correction) and finally there is also the Day of the Four Witches.

The latter should therefore take its name from the Hour of the Witches, which in the collective imagination takes place at the twelfth stroke of midnight, and would loosen the boundaries between the real world and the supernatural one.

But why is it so important?

The “Day of the Four Witches”Is being closely watched by Wall Street financial operators, ready to seize every possible opportunity for speculation. In fact, when all four contracts expire, usually, particular market conditions are created for which there is a significant increase in transactions and therefore an increase in volatility (even if some contracts are extended after expiration with a mechanism called rolling).

This could therefore create anomalous movements (bullish or bearish) in the markets without any connection with the fundamentals of the securities.

The effects on the markets

Although the “Freaky Friday“Is highly anticipated by traders and investors, in practice it may not have major influences on the performance of the lists. In fact, thanks to the hedging possibilities offered by options, swaps and corridors, it is possible to constantly hedge against market rises and falls in order to almost completely cancel any effects generated by volatility.

The day of the four witches, origin of the name and consequences on the markets