What Is Quadruple Witching Day in the Stock Market?

Our strategic partnerships with trusted companies support our mission to empower self-directed investors while sustaining our business operations. We realize that everyone was once a new trader and needs help along the way on their trading journey and that’s what we’re here for. However, bear in mind that the price instabilities are usually intraday and rarely extend to the following trading sessions. Our lessons, designed to help you learn to trade, cover everything from smart buying and selling decisions to the nuances of trends and candlestick patterns. Another factor is quarterly index rebalancing, also known as reconstitution, on the “witching” day. That means portfolio managers tracking rebalancing indexes, including those from S&P Dow Jones in the U.S. and FTSE in the U.K., may need to trade reflecting index changes.

Despite this, the name quad witching has stuck around as this change has only happened in the last few years. The “witching hour” is a magical time of day when terrible things may be going on, according to legend. This term has been adopted informally in derivatives trading to refer to the hour of contract expiry. Once each quarter, four separate types of contracts expire at the same time on quadruple witching day. These are the listed index options, single-stock options, index futures, and stock futures.

June 16, 2023

This juncture presents a unique opportunity to observe how market dynamics unfold as contracts simultaneously reach their expiration. Traders, both seasoned and novice, keep a watchful eye on the intricate dance of numbers and possibilities, seeking to decipher the patterns that emerge from this moment of convergence. Index options are derivative contracts where the investor is given the right to transact the index such as the S&P 500. You can have call options (where you are given the right to purchase the stocks at a predetermined price) or put options (where you can sell the stocks at a predetermined price).

See Why Futures Contracts Rollover – Learn How It Impacts the Market

They are also suitable instruments for investors willing to hedge a portfolio of separate stocks. There are other dates as well including certain times of the month or quarter where funds and ETFs will rebalance their portfolios. But perhaps most significantly, there is an event that happens four times per year, once in each quarter, that has become infamous.

Stock Index Options

• This type of price action could be related to the announcement of a shelf offering or the execution of an “at-the-market” sale from…
• First is the number of traders that would want to offset their contracts.
• We could charge more, but we have a pay it forward, give back mentality.
• There are other dates as well including certain times of the month or quarter where funds and ETFs will rebalance their portfolios.
• During such expiration the volatility can be high and prices might plunge making a period of wild activity, just like the “witching hour”.
• One interesting quirk is that the price of a security may artificially tend toward a strike price with large open interest as gamma hedging takes place, a process known as pinning the strike.

Large positions are often unwound around opening or closing on quadruple witching days, and traders should be on the lookout for block trades that cause significant price movements. Throughout the length of a quadruple witching day, there are transactions involving huge blocks of contracts. This spike in volume can cause price swings, giving arbitrageurs the opportunity to profit from momentary price distortions. Especially when high-volume round trips are repeated numerous times during trade on quadruple witching days.

While increase in liquidity is preferable, sudden increase in implied volatility just before settlement can cause major pain, especially to the short option positions. Instead, they can close their contracts by registering an offsetting trade at the prevailing price. In this manner, they can settle the gain or loss from the buy and sell prices. They do this by offsetting the existing position and simultaneously booking a new option or futures contract to be settled in the future. During Quad Witching, traders may begin rolling, which involves closing out positions set to expire and opening new ones for a future date. Offsetting is another strategy where traders close positions by taking an opposite position to mitigate risk.

Level 1 vs. Level 2 Market Data

This results in a convergence of futures prices to the spot prices, known as convergence, which contributes to the heightened volatility and substantial volume on Quad Witching days. With all of these contracts expiring on the same day, quad witching does tend to lead to higher trading volume during these sessions. As the contracts expire, investors need to either close out the trades, let them expire in swissquote review and rating the money, or roll them forward.

• For example, prices of stocks and derivatives may swing sharply due to the simultaneous expiration of futures and options.
• Single stock futures are contracts that obligate the buyer to deliver shares of the underlying stock on the contract’s expiration date.
• Institutional investors, such as mutual funds and pension funds, possess significant capital, which allows them to make large trades.
• Traders can utilize this data to capitalize on short term price movement, pinning strategies and volatility.
• In other words, on the quadruple witching day, you have four different types of derivative instruments that expire.

“Quadruple witching” refers to the simultaneous expiration four times a year of stock options, index futures, and index futures options derivatives contracts. The fourth type of contract involved in quadruple witching, single-stock futures, hasn’t traded in the U.S. since 2020 and was never a major contributor to equity trading volumes. What Stock market myths is now effectively “triple witching” occurs on the third Friday of March, June, September, and December. Equity trading volume tends to rise on these days and is typically heaviest during the last hour of trading as traders adjust their portfolios. The following week of a quad witching day, market indexes such as the S&P 500 tend to fall. One explanation is due to the exhaustion of short-term demand for equities.

How to trade in Quadruple Witching

During Quad Witching, market participants exhibit specific behaviors driven by the simultaneous expiration of derivative contracts. Here, we explore the roles and reactions of different investor types and market facilitators, offering insight into this event’s complex interplay. Technical weltrade highest rebate 95% indicators play an important role in trading, and particularly in day trading. Indicators provide deeper insight into price movements and give traders the information they need to identify potential setups and make trading decisions. It is a financial derivative, just like a stock option, but the underlying asset is an index here.

This is a day when several types of contracts expire, leading to high trading volumes and sudden price changes. However, instead of purchasing individual stocks, index options provide investors with the right, but not the obligation, to trade against the index. The profit on the transaction is determined by whether the index price or value is higher or lower than the option’s strike price on the expiration date. The amount is the difference between the option’s strike and the index value at expiry being paid out.

That way, they can settle their loss or gain from the purchase and sale prices. Others might choose to extend the contract (to roll it forward) by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future. This is called gamma hedging, and is part of the nature of expiring products and the risk management of market makers and dealers.