Definition
Quadruple witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. This event occurs on the third Friday of every March, June, September, and December. It often results in increased trading volume and volatility due to the high number of contracts expiring.
Key Takeaways
- Quadruple witching refers to an event that occurs four times a year, on the third Fridays of March, June, September and December, during which market index futures, market index options, stock options and single stock futures expire simultaneously.
- This event is usually accompanied by a noticeable increase in trading volume, as traders seek to close out their positions before the end of the day. This can lead to increased volatility in the markets.
- While quadruple witching can create short-term irregularities in specific markets or stocks, it doesn’t typically have a significant impact on the overall market or the valuation of individual stock prices in the long term.
Importance
Quadruple witching is a critical finance term due to its potential impact on the stock market.
It refers to a date on which four types of derivatives products — stock index futures, stock index options, stock options, and single stock futures — all expire simultaneously.
This event, happening only four times a year (on third Fridays of March, June, September, and December), can result in increased trading volume, heightened volatility, and unpredictability in the markets.
Consequently, investors and analysts closely monitor these periods since they can create substantial market fluctuations as traders close, roll over or offset their positions, offering both increased risks and opportunities for traders.
Explanation
Quadruple witching refers to the simultaneous expiration of various types of financial derivatives including stock index futures, single stock futures, stock index options, and stock options. This phenomenon occurs on the third Friday of March, June, September, and December, which is why it’s known as quadruple ‘witching’. Its purpose is primarily the result of market procedures; these financial contracts, which are used either to speculate on the market’s direction or to hedge against adverse price movements, have fixed lifespans and all happen to expire on these specific dates.
The practical use of quadruple witching lies in its potential to stir up high volumes of trading activity, as traders close, roll over or offset their positions. This often leads to augmented market volatility, which may present unique opportunities for savvy investors and traders.
Nevertheless, the increased activity and volatility can also bring with it more risk and uncertainty within the marketplace. Thus, quadruple witching days are significant events on the economic calendar that market participants monitor closely.
Examples of Quadruple witching
Stock Market Movements: An example of quadruple witching can be observed through the stock market’s movements. In December 2020, Wall Street experienced a particularly volatile trading day as a result of quadruple witching. This resulted in substantial movements in stocks such as Tesla, which was recently added to the S&P
Traders had to adjust their derivatives and portfolios, leading to high volumes of trade and increased volatility.
Exchange Traded Funds (ETFs): Another example of quadruple witching can be observed with ETFs that track indices. When the expiration dates of futures and options align in what’s known as “quadruple witching”, major rebalancing of portfolios that include ETFs occurs. This can cause transaction volumes and volatility to intensify, as seen in September 2019 on one quadruple witching day when the ETF trading volume rose significantly.
Impact on Individual Stocks: As another example, take the case of a company like Apple. If Apple had a large number of outstanding futures and options contracts set to expire on a quadruple witching day, and concurrently announced important news such as an unexpected change in earnings, it would create a high level of volatility in the stock. This would be a direct influence of the quadruple witching phenomena.
Quadruple Witching FAQs
What does “Quadruple Witching” mean?
Quadruple Witching refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. It happens on the third Friday of March, June, September, and December.
What is the significance of Quadruple Witching days?
Quadruple Witching days are significant as they are typically associated with notable increase in trading volume, and sometimes volatility, as investors close, roll out or offset their positions. It can often lead to greater liquidity and frantic trading activity.
Does Quadruple Witching impact stock prices?
While it can cause increased trading activity and volatility, it doesn’t necessarily impact the overall direction of market or individual stock prices. It is mainly the result of increased buying and selling activity as contracts are closed and positions are rolled over.
How to trade during Quadruple Witching?
As Quadruple witching may bring increased volatility, it’s generally considered a good idea for inexperienced investors to avoid heavy trading during this period. Advanced and professional traders might use in-depth strategies in attempt to profit from the increased activity, but these strategies come with higher risks.
What is the history of the Quadruple Witching?
Quadruple Witching began in 2002 when single stock futures started trading in the United States. Before that – from 1987 to 2002 – there was Triple Witching, which did not include single stock futures.
Related Entrepreneurship Terms
- Options contract
- Derivatives
- Financial market volatility
- Expiry date
- Stock index futures
Sources for More Information
- Investopedia: This is a trusted source that offers an easy understanding of complex financial terms and concepts, including Quadruple Witching.
- The Balance: It has comprehensive articles about finance and investments, explaining detailed nuances of terms like Quadruple Witching.
- CNBC: This site provides news and expert analysis on world business and financial markets, where you can often find information related to Quadruple Witching.
- MarketWatch: A website offering financial information, business news, analysis, and stock market data, it’s also a good place to find material on Quadruple Witching.
