You may not like it, but "quadruple witching" is destined to become a part of stock-market parlance. Everyone has heard of "triple witching," of course. That's the expiration of options on stocks, stock indexes and index futures. But on Friday, single stock futures contracts, which were launched just last month, also expired. While single stock futures are still a new product and open interest isn't terribly large at this point, some analysts said the addition had an impact on the market Friday. Diane Garnick, chief global strategist for State Street Global Advisors, said the derivatives market has been instrumental in sending the stock market higher. "Investors as a whole are net long puts, which means broker deals are short puts and to hedge their position, they needed to short
index and single stock futures," she said. "Now as these puts expire, the dealers are coming back in and buying back those futures, so that's what's providing a lot of the support today." A put is an option to sell a stock at a certain price at a certain date in the future and is a bet that the price of the stock will go down. The brokers who sell these put options typically take offsetting positions (by shorting futures) to protect themselves if the stocks do in fact go down and they are forced to buy back shares from their customers at the strike price. When put options expire or are closed out, brokers are left with exposed short futures positions, which they must then cover. Garnick, who said she has been surprised at the volume and immediate acceptance of single stock futures, expects Friday to be the most heavily traded day of the quarter. Nasdaq volume hit 1.96 billion, while NYSE volume hit 1.78 billion.
The number of single stock futures traded on OneChicago stands at 83, of which 43 expired Friday. Open interest stands at 31,361 contracts, according to a spokeswoman, with average daily volume at 6,364 contracts. Each contract is worth 100 shares. The Nasdaq Liffe Market, which also launched single stock futures on Nov. 8, trades about 43 contracts, 34 of which expired Friday. Still, other observers weren't so sure that the market action Friday was altogether related to quadruple witching. In fact, some market watchers said any moves have had more to do with the quarterly rebalancing of the S&P 500 and the annual reconstitution of the Nasdaq 100 after the close. Fundamental factors like an upbeat speech from Fed Chairman Alan Greenspan and strong GDP data were also fueling the gains, traders said. Peter Borish, senior managing director at ChicagoOne, said the level of open interest on single stock futures is too small to have an impact, and he noted that the market has not been particularly volatile so far. Indeed, stocks have traded in a fairly narrow range for several hours. "The market has become very efficient and information is known so well ahead that the volatility is absorbed over time rather than immediately," said Brian Pears, head trader at Victory Capital Management. Jon Najarian, an options trader at Mercury trading, agrees that the expiration of single stock futures hasn't had a material impact on the broader market. "I haven't seen the effect of this quadruple witch," he said. "People that have traded single stock futures so far have been mainly professionals." Najarian noted that most investors simply can't afford to take delivery of single stock futures as they turn into stock. If customers were aggressively trading out of positions, that could add to the volatility but so far, he said, the market for these instruments is fairly illiquid.