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The Best Way To Trade The Last Hour Of Quadruple Witching Friday Using Nadex Binary Options And Nadex Spreads

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“Freaky Friday" is one of the most important days for any trader to be aware of due to the impact it has on the markets. What is the best way to trade this unique quarterly event? Futures carry a high risk, options have exercise issues, stocks require a lot of capital and most of these instruments have the risk of being stopped out during this highly volatile event. There is one solution to take advantage of the volatility on this specific day that solves the issues that normal option, future, and stock traders have to face. Before getting into the solution, it is important to understand what this unique day is and what causes the volatility to occur on “Freaky Friday”. 

The day was most commonly called "Triple Witching Friday", previous to 2002 when Single Stock Futures were introduced.  Now with the addition of single stock futures, it is called "Quadruple Witching Friday". Some still refer to the day as "Triple Witching Friday" as Single Stock Futures are not a widely known about or traded instrument. This "Freaky Friday" occurs on the quarterly expiration of four types of options; hence the updated name to "Quadruple." The four option types are stock index futures, stock index options, stock equity options, and single stock futures whose expiration dates all align and expire on the same day. This “coven” of four having simultaneous expirations that impact the market, is where the term “Witching” came from. This always occurs on the third Friday of March, June, September and December. The simultaneous expiration of these four types of options can cause some chaotic volatility markets and at the very least, chop.

Is Quadruple Witching Friday Bullish or Bearish?

The event itself is not bullish or bearish. Though regarding seasonality, according to Wiley’s Stock Trader’s Almanac Online, over the past decade, June Quadruple Witching days have been bullish days over 70% of the time for the DOW*. The day includes both bulls and bears closing out positions due to the all of the various contracts expirations. And with these expirations all happening at once, more positions are being closed out, leading to the increased choppy volatility in the indices.

Many traders have, in recent years, started to close out positions previous to the Quadruple Witching day.  This has muted some of the impact on the markets during this “Witching Event”. However, even with the lessoned impact, this can still be one of the most heavily traded days of the year.

Should a Trader Avoid or Embrace Quadruple Witching Friday?

While some traders try to avoid it, others try to capitalize on it. Traders trying to capitalize on it will get in on the volatility that is often associated with traders closing or exercising their in-the-money options.  The increased activity in the options markets can lead to an increase in implied volatility.  This causes the cost of the option's extrinsic value to increase on future dated expiration options because Vega has a larger impact on options the further they are from expiration. This can provide for a variety of longer term optioned premium plays.  Arbitrage traders also join in on the frenzy of potential price inaccuracies caused by all the volatility.  Most of this chop impact occurs in the final hour of the trading day between 3 PM ET and 4:15 PM ET, as expiration is close at hand. Therefore, more volatility can often be seen during this time and the hour has been termed the "Quadruple Witching Hour."

What Are The Risks In Trading Quadruple Witching Friday?

So, how can you, as a trader, take advantage of this final hour of trading on the indices?  With all the volatility spikes that can often occur leading to a trader being stopped out of a trade, this can cause a lot of risk when trading highly leveraged products like futures.  Many traders don’t want to put up the capital to day trade stocks.  Option traders do not get the best leverage and, depending on the strategy used, risk is not always capped and margin can be high.  Also, many traders do not want to have to deal with the complexities of Greeks, exercise and delivery issues associated with options and futures.  None of these seem particularly appealing to most traders on "Quadruple Witching Friday."  Therefore, they are more apt to just skip trading the day altogether.

So Is There a Good, Better or Best way to Trade Quadruple Witching Friday?

Using low risk Nadex Binary and Spread Options, you can avoid many of the pitfalls that come with trading futures, options and stocks.  You can easily choose to take advantage of the simple and unique options on the Nadex exchange on the US Indices.

·         All Nadex Spread and Nadex Binary Options are cash settled, so there are no delivery or exercise issues to deal with.

·         Every Nadex Spread and Nadex Binary Option has defined risk, so there are no margin calls to be concerned with.

·         Due to the defined risk, no stop loss is required on the trade, so the volatility and opposing spikes that could occur during this final hour are not a risk to the trader.

·         All Nadex Spreads move in an increment of 1 (1 on YM and NQ, .1 on ES, and TF). And the tick value is only $1.00, so you can do 1 contract or 100 contracts.  It is your choice to better control your risk.

·         All Nadex Binaries have a maximum value of $100, so doing a trade with as little as $5, $10, or $30 is a common occurrence.  Because of this, a trader with even a small account can trade on Nadex. The minimum deposit is only $100 to open an account.

·         There are no day trading restrictions or minimum balance requirements, like on Stock & Equity Options, which require $25,000 to perform day trading.

The Risk is often very low, especially with only an hour until expiration. Also, the Greeks are muted due to the short time to expiration. 

·         Theta (With only an hour left until expiration, there is little to no time decay)

·         Vega (This impacts options the further out an option is from expiration, so a one hour expiration will have little to no impact from a change in implied volatility).
·         Gamma (Will be maximized to make the option move fast, creating a highly effective leveraged product, with low, defined risk so the leverage does not cut both ways).

·         Delta (Will be pushed to 1.00 with a minimal move due to the fact that expiration is so close.)

·         Rho (There is no interest and so it does not matter, but if there were with only an hour to go, it would be of no consequence)

As a novice trader, and even as an veteran trader, you can literally ignore the Greeks on these short term expiration and just trade directionally without having to analyze 100 option chains.  Over a dozen different expiration cycles have low risk, small or large positions sizes, no stops, and effective leverage.

You can easily pick among the Nadex Spread or Nadex Binary Options expiring on US 500 (ES S&P 500 Index), Wall Street 30 (YM Down Jones 30), Small Cap 2000 (TF Russell 2000), or US Tech 100 (NQ Nasdaq 100) for the 4:00 or 4:15 PM expirations to trade during the more volatile 3:00 PM to 4:15 "Quadruple Witching Hour." As a trader, you can choose to collect premium or trade directionally.

 

To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting.com, a service provided by Darrell Martin.

*Reference to Wiley Stock Traders Alamanc 6/20/2014: http://www.stocktradersalmanac.com/sta/home.do

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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