Beware ‘quadruple witching’: More volatility ahead?

1 min read

By Han Tan, Market Analyst at FXTM

Heightened volatility has been a staple of US equities since the end of February, with the VIX volatility index staying stubbornly above its long-term average which is normally below 20. US markets could see a sudden spike in volumes later Friday, when large derivatives positions roll over as futures and options expire in what is called ‘quadruple witching’, which happens once a quarter.

During the week of the last quadruple witching on March 20, the VIX surged above 85 to its highest level since the Global Financial Crisis. The S&P 500 and the Dow Jones index then found their respective year-to-date troughs in the following session on March 23, before rallying a stunning 40%.

Although the VIX currently stands far below its March levels, markets could still be roiled by a sudden surge in volumes during Friday’s trading session.

According to Goldman Sachs, some $1.8 trillion of S&P 500 options are scheduled to expire on the day, while estimates by S&P and Dow Jones point to $48 billion of index trades due to rebalance.

While stock futures currently suggest a relatively subdued Friday open for US markets, traders would do well to brace themselves for the potential volatility ahead.

Stock markets are now caught between competing narratives, from the risks of a second wave to the optimism surrounding the stimulus-fueled post-pandemic recovery, with simmering US-China tensions lurking in the background.

As investors hunt for fresh catalysts, the next major event that significantly sways global risk sentiment is set to have a major say on the market’s post-quadruple witching-trajectory.


Euro could sway to €750 bln tune

The Euro will be in focus on Friday, as EU leaders meet via video conference to begin negotiating the proposed €750 bln recovery fund, adding to the €540 bln emergency package already rolled out by EU finance ministers. Considering that the proposal requires unanimous consent, the political wrangling has been intense and is delaying some much-needed stimulus for the ailing EU economy, which is facing its worst recession since World War 2.

Although the Euro surged against the US Dollar in the first half of this month, it failed to repeat the near-1.15 highs last seen in early March and has since moderated.

Further signs that EU members are unable to overcome their differences in rolling out the rescue package, which would only arrive in 2021 soonest, could weigh on the Euro’s upside in the interim. However, a show of solidarity, even if the EU leaders were to make all the right noises over the coming weeks about the fund’s eventual approval, may restore some bullish momentum to the bloc’s currency in the near-term.

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