The days are the third Friday of March, June, September and December. The assets on which the contracts expire on that day are stock options, single stock futures, stock index futures and stock index options. The phrase quadruple witching brings to mind stories https://traderoom.info/ that begin, “It was a dark and stormy night…” or folkloric visions of witches flying chaotically on broomsticks across the brightness of a moon. In the context of investing, quadruple witching also refers to possible chaos but chaos in the financial markets.
- Although the Fed anticipates less aggressive rate hikes moving forward, their target level of 5 – 5.5% is slightly higher than many expected.
- Short squeezes can introduce a lot of volatility into stocks and send share prices sharply higher.
- This is caused by long positions prevailing against short ones, which does have the ability to cause stock prices to fall.
- YouCanTrade is not a licensed financial services company or investment adviser and does not offer brokerage services of any kind.
- The four derivatives contracts accounting for the ‘quadruple’ in quadruple witching are stock index futures, stock index options, stock options, and single stock futures.
March 15, 2019, the first quadruple witching day of the year, saw over 10.8 billion shares traded. This might not seem significant, but the 7.5 billion shares traded in the previous 20 days tell us otherwise. Unsurprisingly, things aren’t the same in the week leading up to quadruple witching.
Markets can make dramatic daily moves and getting emotionally caught up in them is natural. We know from our backtests of the options expiration week that the week after options expiration has lower average returns than any random week. The four months per year that has quadruple witching is, of course, included in this result. Options strategies such as iron condors and butterflies are some strategies that traders will use to capitalize on potential pinning action. The folkloric name “witching” comes from the idea of certain times when dark, supernatural forces are active. It can metaphorically apply in markets if traders are forced to unwind large derivative positions.
The fourth type of contract involved in quadruple witching, single-stock futures, hasn’t traded in the U.S. since 2020 and was never a major contributor to equity trading volumes. What is now effectively “triple witching” occurs on the third Friday of March, June, September, and December. Equity trading volume tends to rise on these days and is typically heaviest during the last hour of trading as traders adjust their portfolios.
Real-World Example of Quadruple Witching
Arbitrage can rapidly escalate volume, particularly when high-volume round trips are repeated multiple times over the course of trading on quadruple witching days. However, just as activity can provide the potential for gains, it can also lead to losses very quickly. Quadruple witching refers to a date where stock index futures, stock index options, stock options, dowmarkets and single stock futures expire simultaneously. Quadruple witching dates are of utmost importance to traders and investors as these dates are usually the most heavily traded days of the year. This is because people are exercising their futures and options before they expire. Because of this, there tends to be greater market volatility on quadruple-witching days.
Impact on Trading Volumes and Volatility
Equity index futures like the E-minis mentioned above have options contracts. Call options let traders buy the futures at specific prices, so appreciate when the market rises. Puts let them sell at specific prices, so can profit to the downside. Quadruple witching is an event in financial markets when four different sets of futures and options expire on the same day. Since options expire on the third Friday of every month, we see a run-up in stock market volatility. Those who were correct in their price assumptions will either want to cash out on their position when the expiration date arrives or roll over.
The full list also includes double witching (when two of the asset classes expire simultaneously) and triple witching (when three of the four markets expire simultaneously). There may be global or domestic events on or near a quadruple witching day that impact or even magnify the effect of this day on the broad market. Right before the quadruple witching day of June 18, 2021, the Federal Reserve announced that, due to inflation concerns, it may raise interest rates in 2023. The result was, on that day, the Dow Jones Industrial Average dropped 1.6%, the Standard and Poor’s 500 dropped 1.3% and the NASDAQ was basically flat. We day traded stocks for over 15 years and the options expiration Friday was the best day of the month, and our strategy was mainly to “arbitrage” between certain stocks.
Real-Life Examples—The Drama of Notable Quad Witching Events
In other words, on the quadruple witching day, you have four different types of derivative instruments that expire. The last couple of years have provided plenty of worthy examples of quadruple witching and the increased trading activity these days. Things aren’t the same in the week leading up to the quadruple witching.
Put options are in-the-money when the stock is priced below the strike price. In either case, the expiration of in-the-money options results in increased trading volume as the underlying shares are bought or sold to close out the options trade. Single stock futures are obligations to take delivery of shares of the underlying stock at the contract’s expiration date at a specified price. Even when single-stock futures traded in the U.S. they were a minor market segment relative to the trading flows in stock options and index options and futures. This is especially important for traders with many positions that need to be dealt with on the last trading day.
The account is then offset and a profit or loss is posted to the investor’s account. Investors use index futures to bet on the direction of the market to make small, abnormal profits. Stock index options work exactly like stock options except their underlying asset is some market index like the Standard and Poor’s 500 or the Russell 3000. The owner of the stock index option has the right, but not the obligation, to exercise their option on the expiration date. If the strike price is below the stock’s index’s current price, it may be profitable for the trader to exercise the option.
The options expiration week is when the options expire and this happens on the third Friday every month. Stock futures are contracts that obligate the owner to buy or sell a specific stock at a predetermined price on a preset date in the future. When a futures contract expires, the holder is obligated to take ownership of the shares and the contract issuer is obligated to provide the shares. Stock futures contracts expire on the third Friday of every third month. While these events can create higher trading volume, the effect of the options market on the underlying stock is limited. While it is true that quadruple witching doesn’t always lead to market volatility, it can happen.
As the year draws to a close, the financial world once again witnesses the alignment of derivatives contracts, creating a crescendo of activity and intrigue. Summer unfolded, and so does the second Quad Witching date of the year – June 16th. Against the backdrop of longer days and warmer weather, market participants brace themselves for another convergence of derivatives contracts. Quadruple witching days occur on the third Friday of the third month in each quarter. This means that the quad witching takes place on the third Friday in the months of March, June, September, and December.
As the first Quad Witching date of the year, March 17th sets the stage for a captivating interplay of market forces. Traders and investors are poised to witness the simultaneous expiration of stock index futures, stock index options, single stock futures, and single stock options. The anticipation builds as these contracts reach their culmination, potentially sending ripples through the market as positions are squared and strategies recalibrated. Quadruple witching dates are important to investors, as such dates are usually the most heavily traded days of the year, attributable to the exercise of futures and options before expiry.
The derivatives involved in quadruple witching are often used for hedging and represent small holdings relative to the stock positions that many institutional investors maintain. Traders may still be able to take advantage of increased volume for trading on quadruple witching days, but these days don’t necessarily present more trading setups than normal. Quadruple witching refers to four days during the calendar year when the contracts on four different kinds of financial assets expire.