Why? Because the Federal Reserve meets on Tuesday to announce a new interest rate cut of up to .50 or .75 bps, which could be a major market mover up or down, and quadruple witching expiration occurs this Thursday. While options expiration normally takes place the 3rd Friday of a month, this Friday, March 21st happens to be “Good Friday,” and the markets will be closed, and although the expiration will take place as usual, the last day to unwind these positions will actually be Thursday, which will likely result in larger than normal volume and volatility.
It makes conservative traders want to hide under rocks and aggressive traders want to jump into the almost certainly volatile action that’s ahead for us.
If you’re unaware of the results that a Fed cut announcement has on the market (flat day until the announcement, then a large, often sudden ‘three push’ move one way or the other than can be 200 or more Dow points in less than 30 minutes), and what happens during a quadruple witching expiration, I recommend trading reduced position sizes next week due to the possibility of heightened and unpredictable price swings potentially in both directions. You may want to confine yourself most days to the intraday time frame unless you have gathered experience trading weeks like we’re about to have.
According to the Street Authority website, a quadruple witching occurs when, “index futures, market index options, stock options, and stock futures all expire on the same day.” Furthermore, “On quadruple witching days, many investors attempt to unwind their positions in their futures and options contracts before the contracts expire. This activity frequently includes repurchasing contracts and closing out other positions meant to hedge against these contracts.” In other words, erratic price moves occur which defy both fundamental and technical analysis.
What’s likely to happen? “Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume. As a result, investors can anticipate and plan for the potential effects of these relatively turbulent trading days.”
Don’t let this week catch you off guard. If you’ve been doing well, the market environment might possibly throw you a curve ball next week and degrade any edge you have temporarily.
UPDATE: In an extremely rare weekend move, the Federal Reserve cut the short-term discount rate from 3.50% down to 3.25%, cutting rates early by .25 bps.
UPDATE #2: JP Morgan Chase announced late Sunday evening that they would be buying financial company Bear Stearns for … $2 per share. The $236 million deal represents a stellar collapse for a large US Financial lending institution, and raises concerns about what may be ahead. This deal was announced before markets opened, so as to contain the potential shock.
I couldn’t help but pass along this quote from the Trader’s Narrative:
“I have a nagging feeling this week will be one to remember. Whether it will be the bulls or the bears that will look on it fondly, only time knows.”
Know what’s ahead and then make the decision in advance how you’re planning to alter course as a result of the potential for large, unpredictable price swings on two or more trading days next week.