The Little Book of Stock Market Cycles: How to Take Advantage of Time-Proven Market Patterns

Chapter Seven

Aura of the Witch

Timing Your Trades around Options Expiration Dates

Since the early days of the Stock Trader’s Almanac back in the late 1960s, we knew options expiration had a profound impact on the stock market. We have been reminding investors of the expiration of stock options ever since. Initially, it was just a written notation on the annual strategy calendars. Then, in 1977, we added a circle around the expiration dates so users could see them at a glance. In 1987, a skull and crossbones icon was placed in the weekly calendar pages on the third Friday of each month to alert folks to the increased volatility around options expiration.

One year later in the 1988 edition we put three skull and crossbones icons on the third Friday of March, June, September, and December when stock index futures contracts expired, embracing the new term “Triple Witching” that had become popular on Wall Street. In 2001, we replaced the skull and crossbones with the witch icon we currently use today. Just as the moon affects the tide the expiration of options and futures contracts pulls the stock market into a cycle of volatility that flows cash into and out of the market, which drives the direction of stock prices.

Financial Incantations

Traders have long sought to understand and master the magic of this quarterly phenomenon. On the third Friday of every month options expire but in March, June, September, and December a powerful coven gathers. Since the S&P index futures began trading ...