QUADRUPLE WITCHING: Grab Your Broomsticks, Turbulence Ahead.

When most hear the word Quadruple Witching, images of Halloween or a straight-to-video horror film come to mind. And honestly, it can play out that way in the market too. Quadruple Witching days fall on the third Friday on the month that a market quarter ends (March, June, September and December). Anyways, I am sure you are wondering why this funny sounding event is something to be aware of… so let me explain.

Most articles on the internet are a bit too technical in their explanation. What small-time investors really need to know is that on this day four types of derivative contracts expire — stock options, stock futures, index options & index futures. And the result is VOLATILITY. A lot of it.

You’ll want to make sure to not react irrationally on days options expire, especially on Quadruple Witching days. Options expire every Friday and I am certain I am certain you’ve noticed how your portfolio moves strangely on these days. But tomorrow, expect even more volatility; even in tickers caught in a strong uptrend. Index futures will result in movement in every single stock that is so graciously confined to its boundaries. So if you hold Amazon — a stock that moves like a bull in a China cabinet at times — do not sell just because its down 50 points.

This particular Friday may be choppier than usual for other reasons as well. For one, many companies are in a blackout period where they cannot buyback stocks or have employees receive stock based compensation. Also,  the S&P is set to re-balance its index definitions next week. The former means that some equity swings will be more violent — with algo’s whipsawing weak-handed investors around like the Incredible Hulk. The latter will certainly lead to massive draw-downs & upswings in individual tech stocks. You don’t simply move Facebook to the communications sector without thousands of investors trading around the index ETFs looking for a windfall.

So, with that being said, don’t be dumb. Especially if you did your due diligence on a stock, checked the technical reads and properly timed your positioning. Your just giving up future gains to the Big Money and causing your own account to bleed out. However, if you have a few speculation plays going on — *cough* Tilray *cough* — then suggest locking in some profit. You don’t need to sell all, but cutting a position down by a quarter or a half results in real money (you know, the type you can actually spend).

Lastly, logically place stop limits on all your trades, which I define as anything you would possibly incur short term capital gains tax on. Ideally, the stop limit should allow the price to move in a normal range without triggering (I will cover stops at a later time). A simple rule is to set it 2 ATRs (average true range) below the current price. An even simpler rule is to just look at how much the stock moves in a day, and pick a point underneath that to set the stop. What you don’t want to to do is set it $0.25 below the current price then watch an opening market draw-down take it out in a matter of minutes. In that scenario you’ll logically look to get back in and in turn cause an April headache when the taxman calls.

Happy Trading,

P. Bateman

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