[Beginner's Guide] Volatility Expansion Fear... What Is the 'Four Witches Day'?

[Asia Economy Reporter Kwon Jaehee] Have you heard of the 'Four Witching Days'? That's right. You probably saw it in the stock market articles last Thursday (the 9th). The term 'Four Witching Days' might sound somewhat unclear at first. Let's find out what 'Four Witching Days' means in our stock market and what impact it has on investors.

What is the 'Four Witching Days'?

It is the day when the expiration dates of four types of derivatives?stock index futures and options, and individual stock futures and options?coincide. This occurs on the second Thursday of March, June, September, and December. On this day, stock prices often fluctuate wildly at the end of trading, which is why it is called 'Four Witching Days,' implying that the "witches" (derivatives) are playing tricks.

'Why do stock prices fluctuate on the 'Four Witching Days'?

Typically, on 'Four Witching Days,' hidden spot stock trades related to derivatives are released into the market as liquidation sales, making it difficult to predict stock price movements. For example, arbitrage positions involving the price differences between spot and futures markets are liquidated, causing unexpected sharp rises and falls in stock prices. The volatility increases as investors who want to close their positions and speculative investors aiming to profit from fluctuations engage in trading.

Why do 'Four Witching Days' occur?

Unlike regular stocks, futures and options have a maximum holding period. Stocks can be held long-term for over 10 years or sold on the same day of purchase. However, futures and options have a fixed maximum holding period, which results in expiration dates.

In the Korean stock market, futures expire once every three months, and options expire once every month.

Futures contracts are available for March, June, September, and December, while options contracts are available for all months from January to December.

Futures expiration dates fall on the second Thursday of March, June, September, and December, and options expiration dates fall on the second Thursday of every month.

The simultaneous expiration of futures and options occurs on the second Thursday of March, June, September, and December.

Volatility Fear on Futures and Options Expiration: The 'Deutsche Securities Shock'

A representative event that highlighted the risks of volatility on futures and options expiration days was the Deutsche Securities Shock on November 11, 2010, an options expiration day. A group that had pre-purchased large-cap KOSPI stocks used Deutsche Securities' trading window to execute massive sales worth approximately 2.3 trillion KRW during the 10-minute closing simultaneous bidding session from 2:50 PM to 3:00 PM, causing the KOSPI index to plunge from 1960 points to 1914 points.

These players had purchased put options betting on a price decline and manipulated the index to fall sharply, earning unfair profits of about 40 billion KRW. At that time, a domestic asset management company that sold put options suffered losses exceeding 90 billion KRW and faced bankruptcy risk. Since this incident, the Financial Supervisory Service has strengthened monitoring, reducing volatility on options expiration days compared to the past, but it still remains higher than on other trading days.

When investing, there are times when you feel uneasy because you cannot tell whether the rise or fall in a stock's price is due to the company's own issues or macroeconomic factors. Some investors may have experienced cutting losses on their stocks without knowing it was an expiration day for futures and options. Remembering the futures and options expiration days that come every three months and the options expiration days that come every month might help ease such anxieties.

Editor's NoteEditor's Note [Beginner's Guide to Stocks] is a smart investment guide for 'Joorini' (stock + beginner). We will kindly and simply explain stock stories unfamiliar to beginners.

This content was produced with the assistance of AI translation services.