How Does Quadruple Witching Occur?
Quadruple Witching occurs as four different types of derivative instruments reach their final trading day at the same time, on the same day. In the US market, the final trading day for stock options is every third Friday of each month. The final trading day for single stock futures, options on index futures, and most index futures occurs every third Friday of the quarter. On the third Friday of March, June, September, and December, the combined expiration of these four derivative instruments creates the Quadruple Witching day.
What Effects Does Quadruple Witching Have?
- On quadruple witching days, and especially during the final market hours, many investors attempt to unwind their futures and options positions before the contracts expire. This activity frequently includes repurchasing contracts and closing out market positions.
- Due to the combined effects of exercise, delivery, hedging, arbitrage, and speculative options trading and futures trading activity during Quadruple Witching days, the biggest observable effect is a dramatic increase in trading volume.
- Traders can expect about a 50% increase in trading volume on this day, as positions are managed before expiration.
- Even though there might be increased amount of volatility in certain stocks during Quadruple Witching, the overall stock market action does not look significantly different from a normal non-Quadruple Witching day. In fact, the quadruple witching day does not end up significantly higher or lower than normal trading days.
- There is a noticeable increase in intraday volatility on most of these days.
- Value of further month options may be slightly higher than usual on the Thursday prior to Quadruple witching, and on Quadruple Witching Friday itself due to the increased amount of trading.
- Because of the increased intraday volatility, options traders holding longer term options positions, using a trailing stop loss or contingent orders, may also experience unnecessary stop outs.
Why It Matters:
Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume. As a result, investors can anticipate and plan for the potential effects of these relatively turbulent trading days for intraday price ranges.