Low volatility suggests quiet quadruple witching

By Angela Moon

NEW YORK (BestGrowthStock) – Options traders expect modest swings on Friday when four major types of futures and options contracts all expire, known as “quadruple witching,” due to a sharp drop in volatility.

Although trading on quadruple witching days is typically hectic as investors unwind interests in futures and options contracts prior to expiration, this expiration may be a bit subdued because the market’s recent upward turn has reduced volatility.

The CBOE Volatility Index (.VIX: ), known as Wall Street’s fear gauge, was down 0.4 percent at 25.81 on Thursday. It had been above 30 for about six weeks until early this week. For the month, it was down 18.4 percent.

“Given that the market has recovered so much in the last five days and the VIX settling at 26 for June options, which was awfully low compared to what we are used to experiencing, I am not expecting a whole lot of movement despite it being a quad witch tomorrow,” said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com.

Stock index futures, stock index options, stock options and single stock futures all expire Friday, and trading increases as investors replace or repurchase existing contracts.

Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research in Austin, Texas, said the potential for “some craziness” or increased volatility is instead expected next week.

“We are finishing up a quarter and we are approaching a new earnings season. We have a volatility level that frankly has come down a little too fast … so the swings that we didn’t see this week will come around next week. VIX futures for July and forward indicate above 30,” Frederick said.

September VIX futures were trading at 30, suggesting an upturn in volatility down the road.


Investors should watch for open interest in options contracts of major market exchange-traded funds to get a sense of where traders are positioned to see the market close on Friday, said Corey Rosenbloom, founder of options website AfraidtoTrade.com.

The open interest in the SPDR S&P 500 fund (SPY.P: ), an ETF commonly called the “Spiders,” show calls and put options are clustered around the $110 strike with around 185,000 contracts each. The SPDR S&P 500 ETF is currently down 0.3 percent at $111.55. This would imply a close near 1,110 on the S&P.

“Generally, professionals are net sellers of options while the retail public are net buyers of options, thus the big funds would prefer the market to settle at options expiration near the largest cluster of options so the professionals get the money they took in by selling the options at those levels while the public’s options expire worthless,” he said. This practice is known as “pinning” the options.

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(Reporting by Angela Moon, Editing by Leslie Adler)

Low volatility suggests quiet quadruple witching