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Quadruple witching

What Is Quadruple Witching?

Quadruple witching refers to a quarterly event in the financial markets where four different types of derivative contracts expire simultaneously. These include stock index futures, stock index options, individual options contracts on stocks, and single stock futures. This synchronized expiration typically occurs on the third Friday of March, June, September, and December. The convergence of these expirations often leads to a significant surge in trading volume and can bring heightened volatility to the market, particularly during the last hour of trading, known as the "witching hour."16,15 While the term "quadruple witching" persists in market discourse, single stock futures have not been traded in the U.S. market since 2020, effectively reducing the event to a "triple witching" in practice.,14 Nevertheless, the fundamental dynamics of heightened activity remain.

History and Origin

The concept of "witching" in financial markets draws its name from folklore, referring to a time when supernatural events are believed to occur, suggesting unpredictable market movements. The phenomenon itself emerged with the growth and increasing complexity of the derivatives market. As exchanges began listing standardized options expiration and futures expiration dates, market participants naturally converged their activities around these specific times. The simultaneous expiration of multiple derivative classes amplified these effects. Over time, the third Friday of quarterly months became the designated day for these major expirations in the U.S. market, solidifying the quad witching event into the financial calendar. Major exchanges, like Cboe and CME Group, publish calendars detailing these expiration dates, which are crucial for market participants.13,12

Key Takeaways

  • Quadruple witching is a quarterly market event occurring on the third Friday of March, June, September, and December.
  • It involves the simultaneous expiration of stock options, stock index options, stock index futures, and historically, single stock futures.
  • The event typically sees a substantial increase in trading volume and can lead to increased short-term price volatility, especially in the final hour of trading.
  • Market participants often engage in activities like rolling over positions, closing out expiring contracts, or initiating new positions, contributing to the heightened activity.
  • Despite the historical term, U.S. markets primarily experience a "triple witching" event since single stock futures stopped trading in 2020.

Interpreting Quadruple Witching

Interpreting quadruple witching largely centers on understanding its impact on market dynamics. The simultaneous expiration of numerous derivative contracts compels a wide array of market participants—from individual traders to large institutional investors—to adjust their positions. This adjustment process can involve closing out existing contracts, rolling positions over to the next expiration cycle, or initiating new trades to capitalize on perceived opportunities. The collective effect is a surge in trading volume and, at times, increased volatility., Wh11i10le the increased activity can provide enhanced liquidity, it can also lead to temporary price distortions as large orders are executed.

Hypothetical Example

Consider an investor holding a substantial portfolio of stock index futures designed to hedging against broad market movements. As the third Friday of a quadruple witching month approaches, their futures contracts are nearing futures expiration. This investor has a few choices: they can let the contracts expire, taking delivery or cash settlement; they can close out their existing positions by placing an offsetting trade; or they can "roll over" their positions by simultaneously selling the expiring contracts and buying new contracts with a later expiration date.

For instance, if they hold September S&P 500 futures contracts with a significant open interest, and they wish to maintain their market exposure, they would sell their September contracts and buy December S&P 500 futures. The concentrated activity of many such investors and traders performing similar actions within a short timeframe contributes to the characteristic high trading volumes and potential price swings observed during quadruple witching.

Practical Applications

Quadruple witching has several practical applications and implications across financial markets. For active traders and institutional investors involved in speculation or hedging with derivatives, these days are critical for managing their positions. Many may choose to roll over their existing options contracts or futures contracts to the next quarter to maintain market exposure without having to take delivery of the underlying assets. This rolling activity is a significant contributor to the elevated trading volume.

Beyond individual portfolio management, quadruple witching events are also observed for their broader market impact. While the expectation of extreme volatility has somewhat diminished due to increased market efficiency and automated trading, there can still be pronounced price movements. Financial professionals analyze historical data and current open interest to anticipate potential areas of market turbulence. Regulators, such as the U.S. Securities and Exchange Commission (SEC), continuously monitor derivative products and their impact on market stability, periodically updating rules to ensure transparent and efficient trading. The9se periods can offer opportunities for short-term traders to capitalize on price anomalies or for sophisticated algorithms to engage in arbitrage.

##8 Limitations and Criticisms

While quadruple witching is a well-understood market phenomenon, its actual impact on overall market volatility is a subject of ongoing discussion. Historically, these events were often associated with significant and sometimes unpredictable price swings, particularly in the last hour of trading—the "witching hour." However, with advancements in electronic trading and increased market efficiency, the extreme volatility once characteristic of these days has become less pronounced.

A co7mmon criticism is that the focus on quadruple witching can lead to unnecessary apprehension among less experienced market participants, who might overestimate the potential for disruptive price movements. While trading volume undeniably surges, the underlying market structure and increased liquidity often absorb the large influx of orders without leading to sustained market dislocations. Nevertheless, the concentrated activity can still create short-term challenges for price discovery and order execution, especially for very large orders or illiquid securities. Investors should be prepared for potential rapid price movements during these periods and consider risk management strategies, such as stop-loss orders.,

6Q5uadruple Witching vs. Triple Witching

The primary difference between quadruple witching and triple witching lies in the number of derivative types expiring simultaneously. Triple witching refers to the concurrent expiration of three types of contracts: stock options, stock index options, and stock index futures. Quadruple witching adds a fourth type: single stock futures.

Confusion often arises because, while the term "quadruple witching" remains in common usage, single stock futures no longer actively trade in the U.S. market as of 2020. This means that, in practical terms for U.S. equities, what is referred to as "quadruple witching" now functions like a triple witching event. Both events occur on the third Friday of March, June, September, and December, and both are characterized by increased trading volume as market participants manage their expiring positions.

FAQs

When does quadruple witching occur?

Quadruple witching occurs four times a year, specifically on the third Friday of March, June, September, and December. The exact dates can be found on calendars provided by major exchanges like Cboe and CME Group.,

###4 3What happens during the "witching hour"?
The "witching hour" refers to the last hour of trading on a quadruple witching day, typically from 3:00 PM to 4:00 PM Eastern Time. During this period, there is often a significant acceleration in trading volume and heightened volatility as traders rush to close, roll over, or exercise their expiring derivative positions.

2Does quadruple witching always lead to market crashes?

No, quadruple witching does not reliably lead to market crashes. While it typically results in increased trading volume and can bring about short-term volatility, modern market structures and automated trading systems often help absorb the concentrated activity without causing severe, sustained market dislocations.

1How do investors prepare for quadruple witching?

Investors, particularly those holding expiring options contracts or futures contracts, prepare by planning their strategy for managing those positions (e.g., closing, rolling over, or exercising). Understanding the potential for increased trading volume and short-term price movements allows them to anticipate market behavior and adjust their trading tactics if necessary.