Quadruple Witching Roils Stock Market, Sparking Bursts of Volume
Comment of the Day

December 18 2020

Commentary by Eoin Treacy

Quadruple Witching Roils Stock Market, Sparking Bursts of Volume

This article by Lu Wang for Bloomberg may be of interest to subscribers. Here is a section:

Coinciding with the event is Tesla Inc.’s widely-watched inclusion in the S&P 500, a development that alone is estimated to force roughly $80 billion of stock trading. While all the turbulence means headaches for traders, some market watchers view it as the final chance for investors to shuffle big holdings before liquidity thins out into Christmas and the New Year’s holidays.

“Traditionally these are outsized liquidity days, and following the rebalances we expect liquidity to dwindle into year-end,” Wells Fargo & Co. strategist Chris Harvey said. “In other words, Friday is likely the last opportunity to make major portfolio shifts before the 2020 liquidity window closes.”

Quadruple witching typically fuels trading as large derivatives positions roll over. While spikes in volume usually occur around the open and close, providing windows of robust liquidity, large price swings can happen suddenly at any time of the day.

Eoin Treacy's view

Tesla trades at an historic P/E of more than 1000 and a forward P/E of 297. That’s a racy valuation by any definition. The fact it also has a market cap of $630 billion and will occupy a greater weighting in the S&P500 than Berkshire Hathaway is going to greatly increase the overall valuation of the Index.

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