Stock index futures, expiration day volatility, and the “special” friday opening: A note

✍ Scribed by Anthony F. Herbst; Edwin D. Maberly

• Publisher: John Wiley and Sons
• Year: 1990
• Tongue: English
• Weight: 136 KB
• Volume: 10
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990100309

✦ Synopsis

he cash settlement feature of the Standard & Poor's (S&P) 500 futures and S&P T 100 options requires that arbitrage positions be unwound or rolled over immediately prior to expiration. This has led to concerns that index futures and index options have a destabilizing effect on equity prices during the last hour (i.e., the "triple witching" hour) of trading on days on which the S&P 500 futures, S&P 100 options, and options on individual stocks expire simultaneously. Prior to June, 1987, this occurred on the third Friday of March, June, September, and December. The decision by the Chicago Mercantile Exchange in 1987 to alter settlement procedures for the S&P 500 futures was a direct result of these concerns.

Beginning with the June 1987 S&P 500 futures contract, the last trade day was moved from Friday to the Thursday preceding the third Friday of the contract month with final settlement based on a "special" Friday opening for the underlying index. Expiration procedures for the S&P 100 options were not altered and remain the close of trading on the third Friday of the contract month. Today expiration is no longer synchronized between the S&P 500 futures and S&P 100 options.

Expiration procedures were altered in an attempt to reduce spot expiration day volatility (i.e., in particular triple witching hour volatility). Volatility is measured by the standard deviation of returns. Has this change been effective? This note investigates that question.'