Quadruple Witching Guide

Normally the third Friday of each month is Options Expiration day anyways, but it just so happens that for each of these four months, the OPEX coincides with the expiration of three other derivatives markets. Another factor is quarterly index rebalancing, also known as reconstitution, on the “witching” day. That means portfolio managers tracking rebalancing indexes, including those from S&P Dow Jones in the U.S. and FTSE in the U.K., may need to trade reflecting index changes. In this guide, we’ll explain what quadruple witching is, when it happens, and why traders should pay attention to it.

What is Quadruple Witching Day?

Quadruple, triple, and double witching all derive their names from the potential havoc with increased volatility. Spikes in trading volume and volatility occur when all of these derivative assets expire on the same day. However, increased trading volume on quadruple witching days is typically not accompanied by higher volatility. This is in part because institutional investors aren’t changing their large long-term positions on these days. The derivatives involved in quadruple witching are often used for hedging and represent small holdings relative to the stock positions that many make money in forex market institutional investors maintain.

Futures contracts are agreements to buy or sell an asset at a predetermined price. Futures contracts are standardized instruments and trade on a futures exchange. This plan should include predefined risk thresholds and a clear comprehension of the trader’s risk tolerance. For example, a trader might decide to only risk a certain percentage of their portfolio on trades during derivatives expiry. Thus, they can ensure that they are not overly exposed to the day’s volatility. The NYSE (New York Stock Exchange) witnessed a heavy trading volume on this day, closing the auction at 2.4 billion shares.

Upon a futures contract agreement, the buyer is obligated to buy, while the seller has to sell the underlying asset at expiry. For example, one E-mini S&P 500 futures contract is worth 50 times the value of the S&P 500. So the value of an E-mini contract when the S&P 500 is 2,100 at expiration is $105,000. This amount is delivered to the contract owner if it is left open at expiration. Successful trading during derivatives expiry requires an acute awareness of how the concurrent expiry of different derivatives can impact market behavior. Traders must be prepared for rapid price shifting and be adept at identifying both the risks and prospects that arise.

For example, purchasing if they feel the index will climb and selling if they believe the market will fall. This interactive brokers prevents a portfolio manager from having to liquidate the portfolio during market falls. Instead, the futures contract makes money while the portfolio loses money.

What is The Effect of Quad Witching on The Market?

• One explanation is due to the exhaustion of short-term demand for equities.
• Arbitrage can rapidly escalate volume, particularly when high-volume round trips are repeated multiple times over the course of trading on quadruple witching days.
• These options grant traders the right to buy or sell a stock index at a predetermined price, known as the strike price.
• However, these opportunities require quick action and sophisticated strategies, as they tend to be short-lived.

On June 18, the trading volume surged significantly, with the market witnessing an influx of transactions as traders adjusted their positions in response to the expiring contracts. Notably, the S&P 500 experienced considerable fluctuations, reflecting the broader market’s response to the expiry. The index oscillated between gains and losses, showcasing the increased market instability that is a hallmark of quad witching days. Futures options, unlike stock options, are cash settled, and can only be exercised on expiration date. Futures and stock contracts involve a complex design of many major participants. Some selling them, some using them as retirement withdrawal calculator hedges, and some arbitraging the price discrepancies via large amounts of trading.

Quad Witching – Market Impact

As with any other witching day, there was hectic activity in the preceding week. According to a Reuters report, trading volume on U.S. market exchanges on that day was “10.8 billion shares, compared to the 7.5 billion average… over the last 20 trading days.” There tends to be a lot of frenzy in the days leading up to a quadruple witching day. But it’s unclear whether the actual witching leads to increased market gains. That’s because it’s impossible to separate any gains due to expiring options and futures from gains due to other factors such as earnings and economic events. While quadruple witching takes place four times a year, stock options contracts expire more frequently—on the third Friday of every month.

• Technically speaking, it is now triple witching, since the fourth type of contract expiry, single stock futures contracts, don’t trade anymore in the US.
• Various derivative contracts reach their expiry, leading to notable shifts in trading strategies and market behavior.
• The last couple of years have provided plenty of worthy examples of quadruple witching and the increased trading activity these days.
• Options are derivatives, which means they derive their value from underlying securities such as stocks.
• What is now effectively “triple witching” occurs on the third Friday of March, June, September, and December.

They are also suitable instruments for investors willing to hedge a portfolio of separate stocks. 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). The next quadruple witching day in 2022 is scheduled for Friday, June 17th, for the close of the second quarter of the year. Following June 17th is September 16th for the third quarter and December 16th for the fourth quarter later this year.

Single Stock Options Contracts

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Although it hasn’t been proven that quad witching regularly causes market volatility, if you’re spooked, it’s easy to just avoid trading options or stocks on these four days each year. If you include the trend of the markets falling post-quad witching, then there is an argument for saying it is a bad thing. With all of these contracts expiring on the same date, it certainly adds overweight trading volume for that particular session. Still, the overall effect of quad witching is minimal to the stock markets so it is still a bit of a stretch to call the event good or bad. Futures contracts are legal agreements to buy or sell an asset at a determined price at a specified future date.

The chart on the next page shows the average performance of the S&P 500 in the 15 trading days before and after quadruple witching day. It was calculated over the past 15 years, which featured 59 quad witch days in total. At certain times – namely the quadruple witching hours of quadruple witching Friday, many investors are closing out contracts they hold, which leads to heavy trading activity. The quadruple witching event in June 2021 led to a near-record dollar amount of single stock equity options. That Friday saw $818 billion in single stock options expiration at the close of the trading session. On March 15, 2019 (the first quadruple witching days for the particular year), over 10.8 billion shares were traded, compared to 7.5 billion on average over the prior 20 days.

There was a significant increase of 25% in trading volume in a single session. The markets after that day traded higher for at least a week, leading to all major indices gaining over 1% on account of additional liquidity. The final act of the year arrives on December 15th, marking the fourth and last Quad Witching date of 2023.

Others might choose to extend the contract (to roll it forward) by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future. Now that you know what quadruple witching is and where its name originates, you can conclude its effect on the market. Years of market history had shown that quadruple witching days could lead to a substantial increase in volatility and (rarely) market havoc. While this isn’t always the case, it is essential to be aware that the markets might be unstable around these particular dates. Single stock futures are obligations to take delivery of shares of the underlying stock at the contract’s expiration date at a specified price.

It’s crucial for market participants to be aware of these dates well in advance. The increased market fluctuations of quad witching necessitates rigorous risk management. Implementing stop loss orders is a fundamental strategy to mitigate potential losses. These orders automatically sell a security when it reaches a certain price, thus limiting the trader’s exposure to a falling market.