Do you know what quadruple witching in the stock market is? In fact, have you ever heard of it? This blog dives into the spooky phenomenon of quadruple witching. We’ll find out what it means to the market and traders in general. So grab your broom, and let’s get flying.
Table of Contents
What Happens on Quad Witching Day?
Quadruple witching in the stock market is also called “quad witching. This spooky term refers to the third Friday of every March, June, September, and December.
And no, you won’t see witches running around on these spooky Fridays. So what’s so important about these spooky dates? Let me tell you.
Quadruple witching happens four times per year when stock index futures, stock index options, stock options, and single stock futures expire simultaneously.
Back in November 2002, when single stock futures started trading, quadruple witching replaced triple witching days.
However you want to spin it, witching events all derive their names from the volatility—or havoc—they wreck on the market.
In folklore, the witching hour or devil’s hour is thought to be the time of night associated with supernatural events.
More specifically, around midnight, supernatural beings are said to roam the earth. At this time, witches, demons, and ghosts appear and are at their most powerful.
What Is the Importance of Quadruple Witching Dates?
Quadruple witching dates are of utmost importance to traders and investors as these dates are usually the most heavily traded days of the year. The reason for this is because people are exercising their futures and options before they expire. Because of this, there tends to be greater market volatility on quadruple witching days.
What happens to derivatives on a quadruple witching date? Holders of derivatives have one of three options, either close their position, roll over their contracts or let it expire. Those who decide to keep or roll over their contract close their existing contract and initiate a similar one with a later expiry date.
Quadruple Witching in the Stock Market Key Take-Aways
- As an option approaches expiry, there are three choices to be made: sell the option, exercise the option, or let the expiration expire.
- On the day of quadruple witching, the market typically declines, but trading is aggressive.
- One of the primary reasons for the increased market volume is that profitable options and futures contracts are settled automatically with offsetting trades.
- New traders should avoid trading on quadruple witching dates as the market.
- After a quadruple witching week, we typically see a calmer market due to exhaustion in demand of near-term stocks.
Contracts Impacted By Witching
For those who haven’t heard about options, I’ll give you a quick rundown. Fundamentally, options are derivates which means their value is based on underlying securities like stocks. Each contract represents 100 shares of stock. When you buy an option contract, you speculate on the future stock or strike price. Likewise, if you think the underlying will go up in price, you buy a call option. Alternatively, if you believe the price will go down, you buy a put.
The beauty of options is they give the contract owner the option but not the obligation to buy the underlying on or before a specific date. And it gets better; your risk’s limited to the price of the contract, that’s it, that’s all.
Since options expire on the third Friday of every month, we see a run-up in stock market volatility. Those who were correct in their price assumptions will either want to cash out on their position when the expiration date arrives or roll over.
Index Options
Just like a stock options contract, an index option allows you the same options but on an index like the S&P 500. Same concept, just a different index. In contrast to stock options which expire on the third Friday of every month, index options
Unlike stock options, index options don’t allow any ownership of individual stocks. Instead, the transaction is cash-settled, giving the trader the difference between the option’s strike and the index value at expiry.
More Contracts Impacted by Quadruple Witching in the Stock Market
Single Stock Futures
Same idea as the two examples above, but the contracts are standardized with fixed quantities and expiration dates. And futures trade on a futures exchange. Additionally, those who hold stock futures contracts don’t receive dividend payments.
Index Futures
Once again same concept except traders buys or sell a financial or stock index. Commonly, investors and traders use index futures to hedge a portfolio of stocks. If, for example, the market declines, the futures contract still earns a profit while the stock portfolio takes a hit. So long as they don’t panic, the investor can hold onto the stocks and ride out the dip without selling.
Quadruple Witching Dates
All the asset classes I mentioned above expire four times a year, or once per quarter. To be more specific, the exact time quadruple witching happens at market close (3.00 to 4:00 pm EST).
The quadruple witching dates for 2021, 2022, and 2023 are listed below:
2021:March 19, June 18, September 17, December 17;
2022:March 18, June 17, September 16, December 16;
2023:March 17, June 16, September 15, December 15.
Why Is Quadruple Witching in the Stock Market Important?
For those who trade futures or options, quadruple witching dates are important as remembering your anniversary or spouse’s birthday. The broom likely will come out. Trust me, the impact of not remembering these dates will reverberate in the years to come. Witching dates are the decisive time to choose what to do with your contracts and how to deal with your open positions.
Of course, if you leave your decision to the last minute and wait for the quadruple day, chances are, you make a bad decision, or at least not the best one.
For these reasons, you must thoroughly plan, have a solid risk management strategy in place so you know what to do once the quadruple witching day comes. Luckily with Bullish Bears, we have a comprehensive options trading course that dives into each and every one of these topics, so you don’t find yourself at the receiving end of the broom.
Everyone Else
The significance of quadruple witching dates is also important for other retail traders who rely heavily on volume and volatility for their trading signals. The reason is that witching dates can distort market information resulting in increased volatility.
For example, once the quadruple witching day arrives, the trader might have difficulty figuring out what caused the price changes. Was it due to its fundamentals, some announcement, news, or because of a huge number of derivative contracts expiring on the same day?
In a nutshell, quadruple witching is important for traders when they’re attempting to predict the behavior of the market. But one thing we know for sure is that after the quadruple witching week, the market usually calms down. Because the demand for near-term stocks gets exhausted, typically, the market declines.
The Week Before: Beginner Traders Heed Warning
It should come as no surprise that things aren’t the same in the week leading up to quadruple witching. For the last 15 years, the S&P 500 has had 59 witching events. Analysis of the chart shows that the index rallies around the 6th day before to the day before the witching. However, the trading during a witching day is more aggressive, and the market isn’t necessarily kind to beginners.
Quadruple Witching Over The Last Few Years
The last couple of years have provided plenty of examples of quadruple witching and the increased trading activity these days.
On September 18, 2020
On September 18, 2020, a quadruple witching day, we saw a surge in equity transactions. In fact, an astonishing 14 billion shares changed hands. To put this in perspective, the volume on this day was 40% above the three-month volume average. We also experienced a surge of volatility as traders closed out their trades to secure profits.
March 15, 2009
March 15, 2019, the first quadruple witching day of the year, saw over 10.8 billion shares traded. Now, this might not seem significant, but the 7.5 billion shares traded the previous 20 days tells us otherwise.
June 19, 2021
Fast forward to this past Junes’ quadruple witching event; we saw a near-record dollar amount of single stock equity options. When the dust settled, that Friday saw $818 billion in single stock options expire at the close of the trading session!
How to Take Advantage of Triple Quadruple Witching
Quadruple witching events are the times where arbitrage traders thrive; it’s their bread and butter. Arbitrage is a risk-free trading strategy that allows traders to exploit market efficiencies when it comes to the pricing of various securities.
Unlike those who scalp trade on the trend or news in an attempt to profit from price changes, arbitrage traders attempt to profit from market inefficiencies. Due to the increased volatility during quadruple witching events, arbitrage traders thrive, further increasing the trading volume.
Closing Thoughts To Ponder
As cliche as it sounds, the most successful traders are the ones who keep persevering. Behind every success story, you’ll find the stories of multiple failures then suddenly a turning point. Moreover, I can confidently say that persistence is the best predictor of success in the stock market. Putting in the blood, sweat and tears learning how to trade and practicing until you’re ready are the critical steps needed to succeed.
Fortunately, today, there are more opportunities to learn than ever. Even if you don’t have a lot of money but are willing to put in the work, profits will come. Bullish Bears programs and classes are designed precisely to make you successful. For some of the lowest prices in the industry, you can enroll and have access to professional traders who want to see you succeed.
