1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

Expiring Options Trigger Triple Witching, Quadruple Witching

Stock Market May React Unexpected Ways

By

Four times a year the stock market experiences "triple witching" or "quadruple witching hours."

What sounds like a line from a cheap horror movie is actually a warning you are likely to hear four times a year when four speculative derivatives all expire on the same Friday.

The event happens on the third Friday in March, June, September and December when stock options, index options, single stock futures and index futures all expire on the same date.

Stock options expire on the third Friday of every month and combine with the other three derivatives on the third Friday of the months above to create the quadruple witching effect.

Whether you hear triple or quadruple witching, it refers to the same event.

The speculative investments are not for beginners and the reason these four Fridays carry a warning is the market can be especially chaotic on these freaky Fridays.

The reason for the chaos is traders in the expiring contracts scramble to close their positions and as they do, their actions may push the market up or down.

Most of this action occurs in the final hour or so of the market and usually adds an extra measure of volatility to the action.

Some traders may try to profit from this increase volatility, but it's really difficult to know whether the action will push the market up or down (or up and down).

For long-term investors, the uproar is often of no consequence. However, it points to a temptation that many fall victim to and that is the apparent chance to make some quick (and easy, the pitch goes) money in the market.

Options, future contracts and other speculative derivatives are perfectly legitimate investment alternatives. They are also not for novice investors. Yet you'll frequently see on the Internet or in your e-mail box offers classes that will teach you how to trade derivatives for huge profits.

There is no doubt that some traders to make a very good living buying and selling various derivatives. However these traders spend many hours learning the derivative markets, how they work and how they respond to various market influences.

Derivatives such as these are risky and it is certainly possible to lose your entire investment in a very short period if you don't know what you're doing. Becoming proficient in trading derivatives takes a lot of study and practice to become proficient.

Don't be tempted to take a class or buy an online course that promises you can be a trader with very minimal effort. This is simply not going to happen for most traders. Even worse, don't be tempted to try your hand at derivative trading based on your gut instincts as a guide to placing trades.

You may get lucky make a little money but sooner or later - most likely sooner - the realities of the market will turn against you and you will lose a significant amount of your investment if not the whole thing.

If you're truly interested in using these derivatives as part of your investments plan, I would suggest you find a trusted financial advisor who is an expert in these products to help you place trades and make decisions about entering and exiting the market. You might ask a friend or associate if they can recommend someone who they had used and can vouch for their ethics and success. Otherwise be very careful about beginning a program with someone you don't know.

It would probably be safest to invest no more than 10% of your total investment capital in speculative investments such as derivatives at least until you become very familiar with the process and believe you can stand the additional risk.

As for the triple or quadruple witching hour, long-term investors should sit tight and let the madness pass. The market usually rights itself the following week.

The reason it is important to know these dates is you are better off not planning any buying or selling on these Fridays, especially late in the trading day.

You never know what will happen on "Freaky Friday."

©2014 About.com. All rights reserved.