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A Comprehensive Guide on Quadruple Witching

26 Jun 2023

Introduction

Financial markets have become extremely popular in the present era. As more people engage in trading and investment activities, events centered around stock markets make a buzz and are often a part of news headlines. One such popular event is quadruple witching, a market phenomenon with an enticing name. Let’s learn what it is.

What is quadruple witching?

At first, the term quadruple witching might seem supernatural and spooky. However, not many people know that it is a coinage popular within financial markets. It is used especially in the context of the American financial landscape. Quadruple witching implies a phenomenon when stock options, index futures, options derivatives contracts, and single stock futures all expire on the same day.

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Quadruple witching, as an event, takes place four times a year. These four days are actually the third Fridays of the months of March, June, September, and December, and mark the end of a quarterly cycle.

What derivatives expire on a quadruple witching day?

The four different futures and options contracts that expire on a quadruple witching day include:

  • Stock Options: These give the owner the right to buy an underlying asset at a specified date. These expire on the third Friday of every month. These are not obligatory.
  • Stock Index Options: These are similar to stock options, except that the underlying asset is a stock index rather than a single stock.
  • Single Stock Futures: Futures, unlike options, mandate the buyer to buy or sell an asset at a specific date at a specific price. They also expire on the third Friday of every month.
  • Stock Index Futures: These are similar to single stock futures, except that they represent stock indices instead of single stocks.

When the four of these expire together on the same trading day, it is called a quadruple witching event.

Why does quadruple witching matter?

Quadruple witching is marked by a furor in trading activity. During these events, there is a significant increase in trade volumes due to a number of factors. As old contracts expire, and new ones take form, traders put up several orders on the exchange. Some decide to roll over i.e. enter a similar contract after closing their positions in the current ones, whereas others enter into settlements. Investors also hedge their positions and try to take advantage of market movements and volatility.

The high volume of orders on these witching days can lead to short-term market volatility and fluctuations. It also often gives rise to significant arbitrage opportunities. This period of high stock price volatility, speculation, and high trading volumes can create a magical effect in the popular imagination. Thus, the term witching.

Trading intensifies and such activity is at its peak, particularly in the last hour of the market closing session on the quadruple witching days. This particular last hour is sometimes specifically referred to as the witching hour.

For the year 2023, the dates for quadruple witching are March 17, June 16, September 15, and December 15.

Another important aspect to note in the case of quadruple witching is the closely related term triple witching. Since single stock futures do not trade any longer in the US, the term triple witching is now used synonymously.

Closing Thoughts

Quadruple witching makes for an interesting market phenomenon. Although the term may have supernatural connotations, it’s far from what it actually means. It, in fact, is a very natural stock market event that signifies the simultaneous closures of four different derivative classes. It may not have a significant impact on how you trade and invest, but it is always a great idea to stay informed of the dates of such occurrences. After all, national events or geopolitical actions may have more dramatic effects on market movements if they coincide with quadruple or triple witching.

 

Related Articles: 8 basic principles to follow while trading equities and derivatives | Why Different Derivative Contracts Have Different Lot Size | What are Currency Derivatives in India

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