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

Investors in Stock Market Should Use Caution on "Freaky Friday"

Four Times a Year Things Can Be More Chaotic than Ususal


For long-term investors in the stock market, the daily fluctuations in stock prices is of little concern.

Long-term investors should focus on trends and stay aware of any significant (good or bad) news concerning the stocks they own, want to own or want to sell.

Other than the normal surveillance investors perform, where stock prices are on any particular day is not very important.

There are two exceptions to this rule however when daily prices are very important to long-term investors.

Prices on the day you buy and the day you sell are very important since they mark your entry and exit points. Those two prices determine in general whether you make or lose money on your investment.

In the absence of some extraordinary event that rocks the stock market, most days pass without unusual volatility that isn't a reaction to domestic and global economic events or release of key information (the weekly unemployment numbers, for example).

However, there are some days when investors can count on more volatility,/A> because of scheduled activity within the stock market itself.

Beware of the "quadruple witching hour!"

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 options, index options, single stock futures and index futures all expire on the same date.

It used to be only three derivatives expired on these days, so the events became the "triple witching hour."

The "hour" is often the last hour of the trading day and may be the most chaotic as traders scramble to close their positions and as they do, their actions may push the market up or down.

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.

Sophisticated traders use the instruments in complex trading patterns or simply to take advantage of a profit they believe is available when the derivatives may give them an edge or hedge another investment they may be less confident of the outcome.

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

Derivatives such as options and futures have an expiration date. On this date, traders must act or the outcome may not be pleasant.

In the case of options, on the expiration date the option goes away, which means the amount you paid for the option is lost. If you want any return from an option, you must either exercise the option, which can be to buy or sell the underlying stock, or sell the option to someone else.

If you have a future's contract, when it expires you may be obligated to buy or sell a stock, commodity or other investment. To avoid this (and most traders want to avoid delivery of the underlying asset), you must sell the contract or offset it with an opposite contract.

Since most traders don't want a truckload of pork bellies in their front yard, they sell or offset the contract, hopefully for a profit.

This is a very simple explanation of a very complex part of the market that is no place for most investors. The dangers are real and the penalties for failure can be very steep.

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

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.