Quadruple witching

Quadruple witching is a quarterly event wherein four sets of derivatives, i.e., stock options, stock index options, single stock futures, and stock index futures, expire simultaneously on the same day. This phenomenon increases trading volume resulting in greater stock market volatility.

Typically, options contracts expire monthly on the third Friday, while futures contracts expire quarterly on the same day. As a result, quadruple witching happens four times throughout a financial year, i.e., the third Friday of March, June, September, and December. Inevitably, there is a spike in trading activity on these days due to traders balancing their positions on all financial contracts.

• Quadruple witching is the simultaneous expiration of four financial contracts on the same date. It includes stock options, stock index options, single stock futures, and stock index futures.
• It occurs quarterly throughout a calendar year on the third Friday of March, June, September, and December.
• Quadruple witching day witnesses intensive market volatility due to the offsetting of options and futures contracts.
• Any major local or global financial event on or around the quadruple witching day may immensely enhance or nullify its impact.

In financial markets, quadruple or quad witching day reveal the extra volatility of the market resulting from the expiry of stock options, stock index options, single stock futures, and stock index futures on the same day. It happens on the third Friday of every quarter. The last hour of the trading session on this day is referred to as the quadruple witching hour.

The coinciding expiration of several derivates results in excessive trading volumes on this day, with traders striving to roll over or close out their positions. These activities may cause relevant price alterations in the underlying assets resulting in great disorder within the market. It usually but not invariably triggers market volatility. This event is analogous to supernatural occurrences associated with the witching hour and thus derives its name from it.

The two critical adjustments of positions on this unique date are:

• Closing the position – Holding a position in total contrast with the current position, revoking the same. 
• Rollout – Closing the current position and holding over another one with a future expiration date. 

Arbitrageurs may use this opportunity to maximize their profits by exploiting short-term variations in stock prices. With proper caution and know-how, investors can make gains to their portfolio even on such an unpredictable day. 

Until 2005, stock options, stock index options, and stock index futures expired quarterly on the third Friday. This event was referred to as Triple witching and the last trading hour as Triple witching hour. Later, single stock futures (created in 2002) sharing the same expiration date was added to the list, and hence, the term Quadruple witching came into use.

Quad witching day is susceptible to any significant national or international fiscal events. Any major happening in the financial landscape can extensively influence the momentum of this day and can change the market trajectory. 

The last quad witching day was on December 17, 2021. So, the next one will take place on March 18, 2022. 

Quadruple Witching Dates in 2021 and 2022

Quad witching encompasses four kinds of financial contracts:

#1 - Stock Options

Stock options are derivatives based on an underlying stock. It permits the buyer to legally purchase or sell the stock, with no compulsion, at a predetermined cost (strike price) on or before a particular date. 

Stock options have two categories: Call and Put. The Call option allows the buyer to purchase and the Put option permits the buyer to sell (or sell short) the underlying stock at a prearranged date and strike price. However, the buyer is under no obligation to do the same.

#2 -Stock Index Options

It is a financial derivative, just like a stock option, but the underlying asset is an index here. It enables the investor to rightfully (no compulsion) trade a particular stock index within the specified period for a set rate. As aforementioned, the Call and Put options accredit the holder to buy and sell the stock indices, respectively.

#3 - Single Stock Futures

Single stock futures are a lawful futures contract between two parties obligated to trade a stipulated number of stocks (in batches of 100) at a definite price on a specific date. There are two positions on future contacts: long and short. While the long position allows buying the stock, the short position agrees to sell on the expiry of the contract.

#4 - Stock Index Futures

It is a cash-settled futures contract to buy or sell a specific market index for the actual price to be arranged at a future date. Stock index futures assist investors in speculating about the market performance 24x7 and making bets to earn small profits.

Example #1

A CNBC report outlines the stock market performance in the third week of September, around the quadruple witching day (September 16, 2021). It reports that S&P 500 index recorded its worst performance on the day since May 12, 2021. The index stood at 4357.73 points, falling by 1.7%. 

The Dow Jones Industrial Average also lost around 600 points registering its biggest single-day drop since July 19, 2021. So, besides rising Covid concerns and brinkmanship in DC, quad witching is cited as one of the reasons behind this market chaos.  

Example #2

According to a Reuters report, quadruple witching Friday (June 17, 2021) will witness the expiry of $818 billion single stock options. The surge in trading volume due to quad witching is expected to drive volatility in some stocks.

According to Goldman Sachs analysts, some of the stocks that will get affected are Hilton Worldwide Holdings Inc, General Motors Co, Valero Energy Corp, IBM, Alphabet Inc, and Salesforce.com Inc.

This has been a guide to What is Quadruple Witching Day. We discuss triple witching hour & quadruple witching dates in 2021 falling on third Friday quarterly. You can learn more from the following articles – 

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• American Stock Exchange