What Is Quadruple Witching? How to Invest During Quadruple Witching Days?

On a market day known as quadruple witching, all single stock options, stock index options, single stock futures, and stock index futures will expire simultaneously. 

During quadruple witching days, trading volume is often higher than average, but this volume is not always accompanied by higher than average volatility in the underlying market.

We will discuss what quadruple witching is, when it occurs, and why traders should pay attention to it in this tutorial.

What exactly is meant by "quadruple witching"?

The term "quadruple witching" refers to the situation in which four different kinds of derivatives, namely stock options, stock index options, stock futures, and stock index futures, expire on the same day. 

These days, lucrative options contracts are automatically executed. Future contracts are either transacted or rolled over to a new contract. In addition, futures contracts are rolled over to a new contract.

The months of March, June, September, and December each have one day designated as a quadruple witching day. The dates March 18, June 17, September 16, and December 16 of the year 2022 are considered to be quadruple witching days.

Four different types of elements in the quadruple witching

Four types of derivatives become invalid on days designated as quadruple witching:

1. Single stock option 

The owner of a single stock option has the right, but not the responsibility, to purchase the underlying stock at a predetermined price until the option's expiration date is also predetermined. Every third Friday of the month is the cutoff date for options. 

Traders have until or until that day to either put their options into action or sell them. At the expiration time, profitable options, sometimes known as "in the money," are automatically exercised.

2. Stock indexes options

Options on stock indexes are very similar to options on individual stocks. The critical difference is that they reflect an entire stock index, such as the S&P 500, rather than a single company's shares.

3. Stock futures

Stock futures are contracts that bind the owner to purchase or sell a particular stock at a defined price on a predetermined date in the future. These dates and prices are set in advance. 

When a futures contract ends, the holder is responsible for acquiring ownership of the shares, and the contract issuer is responsible for delivering those shares. 

The third Friday of every third month is the day that expiration dates for stock futures contracts are set.

4. Stock index futures 

Contracts on the futures market that represent an entire stock index are known as stock index futures. Settlement for index futures often occurs in cash rather than shares of the underlying index.

What happens during the process of quadruple witching?

This can contribute to extreme market volatility and, more probably, price behaviour that is difficult to predict. This is because many large options contracts either expire, are closed, rolled, or exercised.

It is quite a common practice to refer to the final hour of the New York session as the "quad witching hour." This is because both volume and volatility have increased during this time.

In most cases, you will observe a spike in the implied volatility of specific derivatives. There will be a rise in the VIX on the Friday before the quad witching or on that Friday itself.

On the day of a quadruple witching, numerous traders and investors tried to close out their open futures and options positions before the contracts concluded. Repurchasing contracts and closing out market positions are standard components of this activity.

When there is a quadruple witching, there is typically a substantial amount of volatility in the prices of stocks and derivatives and an increase in the trade volume. Investors can foresee and plan for the potential repercussions. 

What kind of impact does quadruple witching have on the market?

The four days of the year that all of these kinds of contracts come to an end are known as quadruple witching days. 

These days, those individuals who bought contracts and decided to practice them will either receive their stock or cash. 

Possibly they will engage in additional transactions to take advantage of arbitrage opportunities. We will discuss these opportunities in the coming section.

An increase in volume may result in greater market volatility and the potential for big swings during the trading day. One of the reasons these days can cause market problems is that investors may desire to extend particular holdings.

How does it work?

For trading off quadruple witching easily, you should run your ideas by a financial expert to make sure you won't wind up casting a spell on your portfolio. This will save you from losing money. 

The term "quadruple witching" refers to four days spread across the calendar year on which the agreements governing the ownership of four distinct categories of financial assets end.

The frequency with which anything like this takes place is an essential consideration. All four asset classes will expire simultaneously once per quarter.

Those four days of the year considered quadruple witching should probably just be ignored by the regular investor for the most part. 

However, savvy investors can use exchange-traded funds (ETF) in certain circumstances to capitalize on the stock market's increased trading volume and volatility.

What are the dates for quadruple witching?

Every stock class part of the quadruple witching process has an expiration date that occurs once every three months. This occurrence occurs on the third Friday in March, June, September, and December.

The moment the market closes is when quadruple witching takes place (3.00 to 4:00 pm EST).

The following is a list of the quadruple witching dates that will occur in the years 2021, 2022, and 2023:

• 2021 of March 19, June 18, September 17, December 17

• 2022 of March 18, June 17, September 16, December 16

• 2023 of March 17, June 16, September 15, December 15

How to gain arbitrage opportunities with quadruple witching?

When a quadruple witching event occurs, arbitrage traders have an excellent opportunity to profit. High-frequency trading firms or algorithmic traders are also part of it. 

They will be able to exploit price disparities among numerous markets or products quickly, typically dominating the market due to the heightened volatility. This further increases the trading volume.

There is a reasonable probability that you are not one of the guys with the infrastructure necessary for millisecond trading at home. Despite this, there is a certain possibility that you can get something from a day with a quadruple witching. 

In this scenario, profit-making from the momentary price distortions will generally not be at the top of your priority list. However, it would help if you began hedging your positions as soon as possible.

Do not put off choosing until the last few hours of the trade, regardless of whether you want to roll out a new contract or offset your existing futures and options contracts. 

Prepare yourself with a plan before you find yourself in a high-pressure situation and are forced to decide.

Is it beneficial or harmful?

The answer to this question is most likely none of the two. Since quadruple witching does not affect market volatility directly, the price of the underlying stocks is not necessarily affected by it. 

Some people believe that quad witching makes the stock market more volatile. However, given that they are derivatives and most are futures contracts, it does not.

If you consider the pattern of the markets going down after the quad witching, there is a case to be made that this is a negative development. 

Since these contracts will expire on the same day, there will likely be excessive trading volume during that particular session. 

Nevertheless, the real influence of quad witching on the financial markets is limited. As a result, it is somewhat of a stretch to term the occurrence either positive or negative.

Is quadruple witching bearish or bullish?

It is impossible to identify a particular trend or the general feeling of the market based on a quad witching day. Some people would argue that it is a negative catalyst because a market decline is possible during the final hour of the quad witching session. 

This is because long positions have been more successful than short ones, which does have the potential to bring about a decline in stock prices.

In most cases, attributing a bearish event to the presence of a quadruple witching is not sufficient.

If we count the stock trend of the markets falling in the week following the quad witch, there is another rationale for it being bearish. In general, quadruple witching is not seen as something to be dreaded or celebrated. It is an ordinary day that occurs once every four years.

Relationship between quadruple witching and volatility 

Even though quadruple witching does not invariably result in volatile market conditions, this does not mean that it never does. 

When four different derivatives have expiration dates on the same day, there is a possibility that this will cause some price volatility for the underlying stocks. This is especially true if stock investors decide to liquidate their positions on that day.

In most cases, the trading options do not immediately affect the underlying stock's price. The underlying stock's price almost always influences the price of the options contract.

A higher trading volume may indicate a more significant number of buyers or sellers than is typical for the market. The price of a stock may be more susceptible to fluctuations if it has a greater concentration of either of these factors. 

This is especially true during the last hour of trade on quad witching day. Well, this is the hour commonly known as the quad witching hour.

Even though it hasn't been demonstrated that quad witching usually causes market volatility, it's easy to avoid trading options or stocks on these four days each year if you're afraid of it.

Putting an end to futures contracts and rolling them out

Most of the activity in futures and options on quadruple witching days is focused on offsetting, closing, or rolling out holdings. 

A futures contract is an agreement between any buyer and a seller in which the underlying stock security is to be delivered to the buyer at the contract price at the time of expiration. This delivery is to take place after the futures contract.

To determine the price of Standard & Poor's 500 E-mini contracts, for instance, which are twenty percent smaller than the standard contract, the index price is multiplied by fifty and forty-five. 

If a contract with a value of 3,100 is still open when it expires, the value of the contract, which is now $105,000, is delivered to the contract owner.

On the date their contracts expire, the owners of the contracts do not accept the delivery but rather have the option to close their contracts by registering an offsetting trade at the prevailing price of cash. 

This settles any profit or loss resulting from the difference between the purchase and selling prices. Traders can also roll forward the contracts by offsetting the current trade and concurrently booking a new option or futures contract that will be settled later.

What are the pros and cons of quadruple witching?

Pros

• Arbitrageurs may be able to make a profit off of temporary price distortions by using quadruple witching.

• Increases in trading activity and volume are observed on witching days, which may be a contributing factor to market gains.

Cons

There is no evidence that quadruple witching leads to increased profitability. This is because market gains are often not very significant. An increase in market volatility may present some opportunities for gains, but it also carries the risk of losses.

Look for the spreads between the asking price and the bid

Are you planning to invest for the long term? You should make the most of your retirement savings and employ dollar-cost averaging to acquire your investments. Thus, quadruple witching is not likely to disrupt your plans in any way.

However, investors need to be aware that there is a possibility of more expansive than average bids and asks. 

This refers to the difference in price sellers and buyers quote each other on stock exchanges (computer and human). Thus, this will result in a higher average trading volume.

Possibly a typical investor wants to buy or sell stocks on a day that happens to be one of the four days of quadruple witching during the year. This is valuable information to notice. Quadruple witching occurs just four times per year. 

If you want to avoid taking on more risk during quadruple witching, the most prudent course of action may be to hold off on investing. You need to hold it till Monday that follows.

What preparations should investors make for the quadruple witching days?

The lesson from Quadruple Witching is that investors need to be aware of what occurs these days and comprehend that there is significantly greater activity in the markets. 

Though there is the possibility of significant price movement! Thus investors should not let themselves be influenced by short-term emotions (which are great advice any day in the markets).

Related questions: FAQs

1. What takes place on the day of the quadruple witching?

A date is referred to as having quadruple witching. It is one of the dates on which derivatives of stock index futures, stock index options, stock options, and trading single stock futures all expire simultaneously. 

2. When are the days that have a quadruple witching for the year 2022?

In most years, the third Friday of March, June, September, and December fall on a date that is considered to be a quadruple witching day.

3. What impact does the Quad Witching strategy have on the stock market?

In the world of finance, an event known as "quadruple witching" occurs whenever four distinct sets of futures and options contracts will expire on the same day. Derivatives are financial instruments connected to underlying stock prices, such as futures and options. When a derivative's contract ends, traders have to either close out their positions or make adjustments. That can potentially cause a considerable increase in volume and order flow.

4. How do you make the most of the quadruple witching opportunity?

The four days out of the year considered quadruple witching should probably just be ignored by the regular investor for the most part. However, savvy investors can use exchange-traded funds (ETF) in certain circumstances to capitalize on the stock market's increased trading volume and volatility.

Bottom line

The phenomenon is known as "quadruple witching" takes place four times a year on days that concurrently mark the expiration of single stock options, stock index options, single stock futures, and stock index futures.

On days that have quadruple witching, the market typically has a trading volume that is higher than average but not necessarily volatility that is higher than average. 

Traders should still be on the alert for volatile price fluctuations, as these days may give possibilities for trading.