Quadruple Witching Day is Coming! Why Do We Care?

On the Quadruple Witching Day, four kinds of futures and options expire on the same day. They are:

• Stock options

• Index options

• Index futures

• Stock futures

It occurs four times a year: the third Friday of March, June, September, December, at market close (4:00 pm ET). The Quadruple Witching Day in 2022:

• March 18

• June 17

• September 16

• December 16

There is another term called the Quadruple Witching hour: the last hour of the trading session on Quadruple Witching Day.

The term ‘witching’ suggests something wicked could happen, which indicates the chaos in the stock market on this day.

Heavy volume

Quadruple witching days witness heavy trading volume as options and futures contracts that are profitable settle automatically with offsetting trades.

So traders will often seek to close out all of their open positions in advance of expiration.

If investors want to keep a position through quarterly expiration, they must sell the expiring contract and buy into the newer contract. This so-called “rolling” is one of the reasons for the heavy volume on quad witching days.

The historical data can vividly explain this phenomenon. The red circles show the heavy trading volume on the quad witching day.

Impacts on Stock Market

 Arbitrage Opportunities

Quadruple witching may provide arbitrageurs the opportunity to profit on temporary price distortions.

Arbitrage is possible because futures and options have their theoretically reasonable prices, but at this point price efficiency may fail.

Therefore, many arbitrageurs will look for suitable trading opportunities during this time.

However, just as activity can provide the potential for gains, it can also lead to losses very quickly.

 Index trends

Data shows that there is a higher probability of upward movement 5 days before the Quadruple Witching Day, and downward movement 5 days after the day.

However, data can only show the probability of an event and cannot be used as a reference for expectations.

Advice for Investors

Trading volume is usually above average on quadruple witching, which can lead to greater volatility.

Short-term traders have to pay special attention to the day's situation. You should avoid intraday trading in this period because you can barely profit from the highly volatile market.

Long-term investors and investors who don't hold futures, options, or other derivatives won't be influenced by this special day.

What's your opinion on the Quadruple Witching Day?

Do you hold these derivatives?

What's your plan?

Share your opinion in the comment section.