“Quadruple Witching” Decoded

12/13/2011 7:00 am EST

Focus: OPTIONS

The third Friday in December marks a rare event known as “quadruple witching,” when four types of options are all set to expire. Here’s how the markets have performed historically on these occasions.

This week brings us the third Friday of the month, which means it is options expiration week. December is also a “quadruple-witching” expiration, which means not only do equity options expire, but so do stock index futures, stock index options, and single-stock futures.

In the analysis below, I break down previous expiration-week returns in a few different ways to see what we can expect.

See related: Trade Options Expiration Like the Pros

Below is a table showing how the S&P 500 Index (SPX) has performed on a weekly basis going back to 2009. According to this data, we can expect good things from the market this week.

Quadruple-witching expirations have averaged a return of 0.86%, and they have been positive 73% of the time. This is far better than a typical week, which averages a 0.28% return and is positive 55% of the time. Plus, you'll notice that other expiration weeks have typically been very bearish.

The last column in the table is also worthy of note, as it shows the standard deviation of returns. With all of the different market players closing and rolling positions, it is generally accepted that quadruple-witching expirations have a lot of potential for volatility. But, while the potential may be there during these unusual expiration weeks, since 2009, it has not played out.

The standard deviation of returns for quadruple-witching expiration weeks is only 2.2%, which is considerably less than typical weeks, with a standard deviation of returns of more than 3%.

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The table below on the left shows expiration week returns so far this year. As you can see, they haven't been very good weeks for the market. Most have been negative, averaging a loss of 0.61%. However, the last two quadruple-witching expiration weeks—in September and June—have been positive. (March was the other quadruple-witching expiration month in 2011.)

The table on the right is a different story. It shows December expiration weeks since 2000, and you can see this has typically been a very good week for the market. In fact, nine of the last ten are positive. Since 2000, December expiration has averaged a gain of 0.38%, and the median was 0.71%.

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By Rocky White, contributor, Schaeffer’s Research

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