Quadruple Witching Strikes on Summer Solstice
Summer Solstice is upon us: the longest day of the year in the northern hemisphere where some religions in the western world believe the sun defeats the forces of evil.
And so far those sun gods seem to be winning, with the Nikkei staging a comeback and European markets higher despite the prospect of "Witching Hour" later in the trading day — when futures and options contracts expire — exasperating any sell-off. But traders aren't resting on their laurels, with volatility surging higher after a major sell-off on Thursday.
(Read More: Witching Hour: CNBC Explains)
"There certainly is a possibility that we will see plenty of volatility," Chris Beauchamp, a market analyst at IG Markets told CNBC. "The cautiously positive start today suggests that the optimists might have the upper hand, at least today."
Triple or quadruple witching occurs when options and futures contracts expire on the third Friday of the month. Before the contracts expire, traders usually look to close positions.
Friday is "triple-witching" in Europe, with FTSE contracts for three types of contracts expiring by midday. In the U.S., the sell-off could be even more pronounced, with "quadruple witching" set to jolt stock markets, as contracts for four types of contracts expire.
"When you come in to the end of that expiry with the news flow we've had in the last couple of days, the kind of price reaction is not going to be separate from that. Inevitably what we are seeing is some very technical trading levels going on, some short term focus going on," Chris Tinker, equity strategist at Libra Investment Service, told CNBC.
Friday's battle between light and dark could hardly come at a more volatile time with the VIX Index (Chicago Board Options Exchange SPX Volatility Index) — used as a gauge of investors' fears — soaring back above its 50-day moving average for the longest period since November of last year.
(Read More: Bond Market Sell-Off Causes Stress in ETF Sector)
Fears over tapering of the U.S. Federal Reserve's stimulus and concerns over China's stuttering growth sent global stocks into a tailspin Thursday. U.S. stocks sank 2 percent and key European indexes pushed below the 3 percent level, in their worst one-day plunge since 2011. But U.S. stocks traded higher on Friday and European shares staged modest rallies before turning lower again.
"It's the northern hemisphere summer solstice today — when some people think the sun has defeated the forces of darkness and many Scandinavians just party...maybe we should be heading for a party at the top of the world rather than watching what I strongly suspect will be a 'dead cat bounce' for a lot of risk assets," Kit Juckes, global head of foreign exchange strategy at Societe Generale, said in a research note.
(Read More: Stocks Bounce Back After Heavy Sell-Off)
Tinker wasn't convinced that the comments by Fed Chairman Ben Bernanke were enough to spark such a sell-off and told CNBC that the reality is that investors are looking over their shoulder and closing their positions after an impressive bull run. Money flows have also returned in large volumes to exchange traded products that track volatility both in Europe and the U.S., according to research firm Markit.
"Everybody is trying to think that they can get out at the same time, it means price adjustments put everybody in vulnerable positions compared with where they thought they were going to be," he said.
(Read More: After Drubbing, Can Stocks Find a Footing?)
"You've got 'quadruple witching' today, you've got the end of the quarter coming up in ten days' time. You are in that environment where suddenly everybody is looking to make sure that they aren't the ones left holding the baby."
—By CNBC's Matt Clinch. Follow him on Twitter @mattclinch81.