[Derivative ABC] Why Do Stock Prices Fall on 'Ne Manyeo's Day'?

[Image source=Yonhap News]

[Asia Economy Reporter Park Jihwan] When encountering news related to the stock market, one can often hear the term 'Four Witching Days.' Some people may wonder why the word 'witch' suddenly appears in the stock market context.

'Four Witching Days' refers to the day when the expiration dates of four types of derivatives?stock index futures, stock index options, single stock options, and single stock futures?coincide. In South Korea, this occurs on the second Thursday of March, June, September, and December each year. On such days, it is common for the market to experience volatility characterized by a flood of closing trades near the end of the session, generally causing the overall stock market to decline.

Why do Four Witching Days occur? Unlike stocks, derivatives such as futures and options all have fixed expiration dates. The day when the buyer of a derivative exercises their rights is called the settlement day. Futures expiration dates and options expiration dates fall on these days. Options expiration occurs on the second Thursday, and futures expiration occurs on the second Thursday of March, June, September, and December.

On these days, a large volume of closing trades for derivatives hits the market simultaneously. When the expiration dates of multiple products coincide and closing trades flood the market, the stock market can experience a sharp drop or, conversely, a significant rise, showing large volatility. The term 'Four Witching Days' thus originates from the idea that derivatives mischievously shake the stock market.

However, Four Witching Days do not necessarily mean the stock price will fall. Looking at the four Four Witching Days this year, three showed bearish trends, and one showed a bullish trend.

On March 12, coinciding with the full spread of the novel coronavirus infection (COVID-19), the KOSPI fell by 3.87%, and the KOSDAQ dropped by 5.39%. On June 11, the KOSPI decreased by 0.86%, and the KOSDAQ by 0.21%. On September 10, the KOSPI rose by 0.87%, and the KOSDAQ increased by 1.71%. Most recently, on the 10th of this month, the KOSPI fell by 0.33%, while the KOSDAQ rose by 0.86%.