The Quadruple Witching Sent Traders into a Frenzy; Here's How You Can Profit Next

Four times every year, the financial media licks their chops to hype a "highly volatile" event called a "quadruple witching" that will send traders into a tizzy.

Of course, they exaggerate just a bit, but the market usually does react. And in doing so, it creates big opportunities for traders who are prepared and know what to do.

The quadruple witching refers to the third Friday of March, June, September, and December. These are the days when stock market index futures, index options, stock options, and individual stock futures all expire all at once.

Stock options expire every month, but we don't read about the broad market caring that much. Sure, the stock in question might see some unusual volume and price movement, but for the rest of us, it's not a big deal.

The quadruple witching day is more important simply because of the quantity and type of options that are "going off the board." Remember, when S&P 500 index options expire, traders have to buy and sell baskets of the stocks that make up the index itself.

Traders braced themselves last week as the market faced the March quarterly options expiration cycle. Price action did not seem out of the ordinary, at least not for the major indexes, but NYSE volume jumped to 5.7 billion shares from its average of about 3.5 billion.

Why should volume pick up like that?

It's not mysterious. Traders often roll over options positions from one month to the next to keep their strategies going. That means they might sell the older option and buy the newer. Right away, we can see twice the options volume for that one trade.

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It's similar for stock volume. A good deal of action is focused on offsetting, closing, or rolling over positions in the stocks, indexes, or futures on which the options are based. And we see a lot of that occurring in the last hour of trading because trades on underlying securities are automatically executed when their options expire "in the money," meaning at a more favorable price than the option's strike price.

Now that you know what the quadruple witching is, it's time to look at how you can turn that spike in trading activity into profits...

Profiting from Everyone Else's Nervousness

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You might think that you can just dive in at the last moment to take advantage of the presumed increase in volatility and volume, but everyone knows this will happen. However, there are still other ways to cash in on these events.

The key thing to know is that witching days are typically not bullish or bearish. The mindset has to be short-term trades and taking profits quickly.

Because some options are expiring, there can be opportunities to arbitrage options that are not expiring. For example, a large block of a stock trades, slightly distorting its price, and the expiring options, which are very sensitive to stock prices, make a move. Implied volatility may change, but longer-dated options are more sensitive to this than the expiring options.

It may be possible to "fade" the long-options move, meaning trading against it. If the long option moves higher, selling that option before implied volatility snaps back could be profitable.

Trading through witching is not for everyone. You have to be fast and have good information. Plus, you are competing with the professionals.

The thing is, you can cash in on options anomalies all throughout the year if you know where to look. You don't need to wait for a frenzied trading day if you follow an expert like Money Morning's options trading specialist, Tom Gentile.

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