What is the witches' Sabbath on the stock market?
The witches' Sabbath on the stock market and notorious and feared at the same time. However, the witches' Sabbath has nothing to do with black magic, but the stock market behaves crazy for other reasons. The witches' Sabbath is the synonym for the big expiration day on the stock exchange. On this particular day, especially large amounts of futures and options expire all at once. This is the reason why the stock market is like bewitched during this time and sometimes fluctuates for unknown reasons.
This great volatility associated with the witches' Sabbath is also the reason for the origin of the name. Over time, stockbrokers coined the witches' Sabbath as a term for the great expiration of options and futures because the stock market can swing wildly back and forth on this day. But the great expiration has nothing to do with magic; it is a regular event on several stock exchanges around the world. On every third Friday of the quarter, many options expire simultaneously on various stock exchanges around the world, causing stock prices to fluctuate wildly.
Why is the option expiration date also called witches' Sabbath on the stock exchange?
The stock market can sometimes behave irrationally. At least that's how it seems. Even though at normal times the stock market sometimes doesn't do what you expect, on certain days of the year this can even be increased. On every third Friday in March, June, September and December, a large number of options and futures contracts expire simultaneously on the same day. This expiration of options is also called expiration date or maturity day.
When options expire, the sellers of the options have to close them out. This means that large transactions take place on the stock exchange in advance, causing the market to fluctuate wildly in certain situations. Even the very best professionals can then no longer explain the price movements on the stock exchanges. For this reason, stockbrokers established the concept of the witches' Sabbath. Since then, the witches' Sabbath has been considered a very special day on the stock exchange, when it is better to watch the market from the sidelines. The risk of losing money on this day is too great even for professionals.
What is the big expiration date?
On the big expiration date, a large number of options and futures on indices and individual stocks expire. This means that significantly more shares are traded on this day than usual. The reason is that options and futures are conditional forward transactions. Here, a kind of contract is made between two parties, with the buyer of the option deciding whether or not to exercise it. Besides the major expiration date, there is also a minor expiration date, which has some differences.
While options AND futures on individual stocks AND indices expire on the major expiration date, only futures on individual stocks expire on the minor expiration date. The impact on the market is much smaller here, which is why the small expiration date is also not as significant as the large expiration day. Another difference between the big and small expiration date is the frequency. The small expiration date takes place every month on the third Friday. The major expiration date, which is the witches' Sabbath, takes place only every 3 months on the third Friday of the month.
Even though the stock exchanges sometimes behave very wildly when it comes to a witches' Sabbath, the big expiration date runs very orderly behind the scenes. Depending on the exchange on which the options are traded, they expire at different times and in a fixed order. On Eurex, for example, all options on the indices expire first, followed by options and derivatives on individual stocks. In the USA, the opposite is true. Here, all options and futures expire between 3 and 4 p.m. New York local time, which is why the effects can be more noticeable here.
What impact does the witches' Sabbath have on the stock market?
The impact of the Witches' Sabbath on the stock market can sometimes be significant. On some witches' Sabbaths, the fluctuation on the stock market is not much different from the days before and after. However, there are also witches' Sabbaths when the fluctuation is very pronounced and the volatility is significantly greater than normal. But it is not only on the big expiration date itself that volatility can be very high. Even days before and even a few days after, prices can still fluctuate strongly.
Institutional investors sometimes try to influence the markets in one direction or another even before the big expiration date. Option sellers also become active on the market in the run-up to the expiration date and possibly cover themselves with shares. During the witches' Sabbath, many shares change hands, which is why trading activity and thus volatility can also be heightened after the actual expiration date.
Although the large fluctuations can sometimes cause uncertainty in the market, the witches' Sabbath usually does not change long-term trend. While for long-term and inexperienced investors the witches' Sabbath can be nerve-wracking, for traders it holds lucrative opportunities thanks to the high volatility. However, the risk of losing money due to the strong fluctuations is also given.