Squawk Morning Briefing: Quintuple Witching?

Today is different from a typical quadruple witching. Normally, the quarterly event would see traders needing to settle up on their holdings of stop options, index options, index ETFs, and single stock futures. This time around, they also have to deal with a change in the makeup of the DJIA following the close — and that presents just one more set of accounts which must be settled into the close.

When trading resumes on Monday GS, NKE, and V will replace AA, BAC, and HPQ. Any mutual fund or ETF that matches the performance of the index will need to divest itself of the stocks being removed and acquire the stocks being added. All this is happening on a day when stocks already show potential for volatility. These changes won’t be insignificant. As of Thursday’s close, V is trading for more than IBM, making it the highest priced component in a price weighted average. Funds that match the DJIA will need to hold 8% of their assets in V come Monday morning along with just under 7% of their assets in GS, and just under 3% of their assets in NKE.

That’s a lot to buy in a few concentrated names. At the same time, selling the low priced stocks being removed won’t raise enough cash. Adding several high priced stocks means the balance of the components will change and holdings of all the other components will need to be reduced. IBM, until now the king of the DJIA, will go from a weighting of about 9.5% to a weighting of about 8%. That means a reduction in holdings of about 1.5% of the total value of the fund. Put another way, these funds will need to sell about 16% of all their IBM along with about 16% of their holdings in every other stock that makes up the index.

These numbers are based on Thursday’s closing print. The actual amount to buy or sell will be determined by the values as we approach today’s close. That means any the volatility of all the products expiring could impact what needs to happen in DJIA tracking funds and vice-versa.

We know from experience that sometimes expiration is wild and often it is a dud. If this does start to become one of the crazier ones then there’s now one more witch with her broom ready to help stir the pot.

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