Once every quarter the expiration dates for stock options, stock index options, single stock futures, and stock index futures fall on the same day. This simultaneous expiration is called quadruple witching. On these days trading volume is typically higher than usual largely due to the offsetting of profitable futures and options contracts. Contrary to what one might expect on such days, market volatility is generally no higher than on prior trading days although the situation always has the potential to cause significant volatility.
Stock Market Quadruple Witching
In November of 2002 trading of single stock futures began. Before that there were triple witching days when single stock options, stock index options, and stock index futures all expired on the same day once a quarter. At times the expiration of so many contracts at one can result in significant volatility. The “havoc” that this can cause in the market caused the use of “witching” as a descriptive term. The witching hour is said to be midnight when evil spirits roam the world and cause misfortune for humans who are abroad at the same time.
Quadruple Witching Days
Quadruple witching days always experience high trading volume. This is because in-the-money call contracts and in-the-money put contracts settle automatically between buyers and sellers at expiration. Call contracts are in-the-money when the strike price of the contract is less than or equal to the current market price and put contracts are in-the-money when the strike price of the contract is lower than or equal to the current market price.
How Does Quadruple Witching Affect the Market?
Quadruple witching always results in higher trading volume due to automatic contract settlements. It may cause the market havoc which caused term witching but may cause very little volatility at all. During the week following quadruple witching it is common to see the S&P 500 and other indices go a bit lower. The usual assumption is that the near-term demand for equities has been partially exhausted. The fact that long term investors including pension funds tend to hold long term positions and thus their actions (or lack of them) act as a damper on demand.
How to Trade Quadruple Witching
Because large blocks of futures and options contracts are traded on quadruple witching day, price distortions commonly occur. This offers the opportunity for arbitrage in both futures and options markets. In fact, there are times when active arbitrage of futures and options contracts adds significantly to the normal trading volume of a quadruple witching day. These can be significant futures day trading opportunities for traders who have the discipline to enter, manage, and exit their trades efficiently.
When Is the Next Quadruple Witching Day?
Quadruple witching happens once each quarter on the third Friday of March, June, September, and December. The days for 2022 are March 18, June 17, September 16, and December 16. Futures traders who wish to hold a position through a quarterly quadruple witching day expiration they need to roll the contract by selling their current contract and buying a newer one.
Triple Witching vs Quadruple Witching
Before there was futures trading on individual stocks there was triple witching of stock options, stock index options, and stock index futures. Triple and now quadruple witching involves options and futures for stocks and stock indices. This does not have to do with commodity futures.
Quadruple Witching Hour
The last hour of trading on a quadruple witching day is called quadruple witching hour. Because of the higher volume and potential for chaos that occurs four times a year on quadruple witching day, traders should pay attention. The last hour of the day is the last time when the mechanics of quadruple witching day can offer profits for arbitration or simply chaos in the stock market. As is common in day trading panic buying and selling can occur on days like this with high volume and the potential for high volatility.
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