Four times a year there is a special event on derivatives exchanges around the world – the so-called Witches’ Sabbath. This day is characterized by the simultaneous expiration of stock options, index options and futures on indices and stocks, which may result in unusually high trading volumes and increased volatility.
• Witches’ Sabbath leads to volatility and unforeseen price fluctuations
• Investors can benefit from fluctuations
• High stress factor
Witches’ Sabbath on the third Friday of March, June, September and December
The Witches’ Sabbath always takes place on the third Friday of the last quarterly months of March, June, September and December on the world’s most important derivatives exchanges. On these days, the contracts for the various options and futures expire, which requires a repositioning of the portfolios of both institutional and private investors. The fine tuning of these financial instruments results in increased activity and may have short-term impacts on pricing and market stability.
On these major expiry days, the futures contracts expire on the major futures exchanges. On the European Exchange (Eurex) futures exchange, the expiry of futures contracts (futures and options) takes place as follows: STOXX Group between 11:50 a.m. and 12:00 p.m.; DAX and TecDAX at 1:00 p.m.; MDAX at 1:05 p.m. (during the XETRA midday auction); and shares at 5:30 p.m. (at the start of the XETRA closing auction). In the USA, settlement prices are determined in the last trading hour of the trading day, between 3:00 p.m. and 4:00 p.m. New York City time (Eastern Time).
Volatility increases dramatically
On days of the witches’ sabbath they can Financial markets are subject to considerable fluctuations. This volatility arises from the unwinding and re-launching of large positions in the affected financial products. Investors and traders try to protect or optimize their portfolios from options and futures expiration, which can result in sharp price movements. Especially for short-term traders, the Witches’ Sabbath can represent an opportunity to profit from price movements.
Although the Witches’ Sabbath is known for its volatility, experienced traders and large investors often prepare thoroughly for these days. This can lead to unforeseen market fluctuations for no apparent reason even days before the Witches’ Sabbath. Investors usually analyze possible scenarios and develop strategies to profit from expected market movements or to hedge their positions. Some of the common strategies include closing old positions and opening new ones to minimize risk and maximize opportunities in the new market environment.
Witches’ Sabbath tends to be bearish for stocks
When it comes to Witches’ Sabbath strategies and trading, the Quantified Strategies website provides detailed analysis. She studies market volatility and trading volume on the Witches’ Sabbath and conducts backtests to understand the impact of these days on the markets. The results show that the Witches’ Sabbath tends to bring bearish developments for stocks and that overall positive results can be achieved during the Witches’ Sabbath week as long as positions are closed before the actual expiry date. However, it should be noted that trading during these days can be very nerve-wracking due to the high volatility.
Phenomenon highlights problems in the financial market
Despite the fascination that the witches’ Sabbath creates, there is also criticism of the market practices associated with it. Critics argue that the forced and often artificial fluctuations do not always reflect actual economic conditions or corporate values. The well-known financial expert Dirk Müller, also known as “Mr. DAX”, is critical of this practice. On his website he emphasizes that it is not to the benefit of the real economy if the settlement of “bets” on stocks and indices can change the value of individual companies up or down by billions of dollars within a few minutes. He illustrates the problem with the metaphor that “the tail now wags the dog,” which underlines the excessive influence of financial markets on the real economy.
Editorial team finanzen.net
