{"id":26952,"date":"2021-08-11T10:04:01","date_gmt":"2021-08-11T14:04:01","guid":{"rendered":"http:\/\/aky.pbv.mybluehost.me\/?p=26952"},"modified":"2023-09-08T14:57:06","modified_gmt":"2023-09-08T18:57:06","slug":"quadruple-witching","status":"publish","type":"post","link":"https:\/\/aky.pbv.mybluehost.me\/quadruple-witching\/","title":{"rendered":"What is Quadruple Witching and How Does It Work?"},"content":{"rendered":"\n

Those who hadn\u2019t heard about quadruple witching<\/strong> probably wonder what can be so spooky about financial markets to be referred to with such an unconventional combination of words. No matter whether it is called quad witching, quadruple witching day, or quadruple witching hour, in the end, it all comes down to one thing \u2013 a day of increased trading activity and often high volatility. This guide explores the topic of quadruple witching. We’ll find out what it means to investors and the market as a whole. Being prepared will help you be more prepared when trading.   <\/p>\n\n\n\n\n\n

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What is Quadruple Witching<\/strong><\/h2>\n\n\n\n

Quadruple witching is a term to describe the days of the year when single stock futures, single stock options, stock index futures, and stock index options expire.<\/p>\n\n\n\n

The more important thing is the scale at which this happens. All four asset classes expire simultaneously once per quarter. The specific days are the third Friday of March, June, September, and December at market close (4:00 pm EST). As a result, hundreds of billions worth of contracts expires simultaneously on the same day.<\/p>\n\n\n\n

The name for this significant market event comes from the centuries-old folklore myth that supernatural beings start roaming the earth and causing chaos and destruction after the witching hour at midnight. Anybody unfortunate to encounter them is said to suffer from bad luck.<\/p>\n\n\n\n

Now that you know what quadruple witching is and where its name originates, you can conclude its effect on the market. Years of market history had shown that quadruple witching days could lead to a substantial increase in volatility and (rarely) market havoc. While this isn\u2019t always the case, it is essential to be aware that the markets might be unstable around these particular dates.<\/p>\n\n\n\n

Quadruple witching is the biggest among all the \u201cwitching\u201d events. The full list also includes double witching (when two of the asset classes expire simultaneously) and triple witching (when three of the four markets expire simultaneously).<\/p>\n\n\n\n

What is The Effect of Quad Witching on The Market?<\/strong><\/h2>\n\n\n\n

For many investors, especially beginner ones, learning how the market dynamics work is a complicated process that may be hard to grasp. However, there are few basic principles that you should remember to be better prepared around quad witching events.<\/p>\n\n\n\n

The most significant effect of quadruple witching on the market is the increased trading volume surrounding the particular period. The reason is that many market participants face the urgent need to deal with their open positions.<\/p>\n\n\n\n

Some might offset existing futures and options contracts that are profitable at the prevailing market price. 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.<\/p>\n\n\n\n

All these market moves usually result in increased trading activity. Below is an estimation of the average value traded on quadruple and standard days from 2015 \u2013 2020 on Nasdaq.<\/p>\n\n\n\n

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Most traders usually see the vast trading volume is as a sign of a healthy market environment. However, there might be situations where it leads to price abnormalities. For example, a window of higher trading liquidity can make it difficult to tell whether it’s option expiration events or a change in business fundamentals driving a stock\u2019s price movement.<\/p>\n\n\n\n

Volatility Spikes<\/h3>\n\n\n\n

Based on the buying and selling dynamics and the prevailing positions, the market can experience increased volatility. The extent of it depends on various factors. First is the number of traders that would want to offset their contracts. The second is the way they want to do it. For example, the so-called \u201clong-gamma\u201d condition where options traders go against the trend instead of hedging their positions. Finally, it includes the events in the buildup to the quadruple witching day and more.<\/p>\n\n\n\n

However, bear in mind that the price instabilities are usually intraday and rarely extend to the following trading sessions.<\/p>\n\n\n\n

Contracts Types Involved<\/strong><\/h2>\n\n\n\n

Quadruple witching involves four different types of instruments \u2013 single options contracts, single futures contracts, index options, and index futures. Bear in mind that many non-US contracts (the DAX futures, for example) can also expire on the same days.<\/p>\n\n\n\n

Here is a bit more about each of the involved contracts:<\/p>\n\n\n\n

Single Stock Options Contracts<\/h3>\n\n\n\n

Stock options contracts are derivatives, meaning their value is based on an underlying security.<\/p>\n\n\n\n

Options contracts give the buyer the freedom to choose whether he wants to complete a transaction for the particular instrument before a specific date and a pre-determined strike price or not. He doesn\u2019t bear any responsibility, so he can let the options contract expire if he doesn\u2019t deem it suitable for trading.<\/p>\n\n\n\n

There are two types of options \u2013 call and put. The former gives its holder the right to buy a stock, while the latter can sell the instrument.<\/p>\n\n\n\n

Single Stock Futures Contracts<\/h3>\n\n\n\n

Futures contracts are agreements to buy or sell an asset at a predetermined price. The future transaction date is also specified in the contract. Futures contracts are standardized instruments and trade on a futures exchange.<\/p>\n\n\n\n

Upon a futures contract agreement, the buyer is obligated to buy, while the seller has to sell the underlying asset at expiry.<\/p>\n\n\n\n

Index Options Contracts<\/h3>\n\n\n\n

Index options contracts give you the right, but not the obligation, to buy a whole index like the S&P 500 or the Dow Jones Industrial Average.<\/p>\n\n\n\n

Functionally, Index options contracts resemble what ETFs do by making it easy to get better diversification by \u201cbuying the market.\u201d<\/p>\n\n\n\n

These instruments are cash-settled and don\u2019t give you any ownership of the index constituents.<\/p>\n\n\n\n

Index Futures Contracts<\/h3>\n\n\n\n

The difference between the index futures contracts and the single stock futures contracts is that the former allows you to buy a whole index instead of just the shares of a single company.<\/p>\n\n\n\n

The profit and loss of these instruments are calculated when the existing position is offset.<\/p>\n\n\n\n

Investors often use index futures contracts if they are willing to speculate on the direction of the particular index. They are also suitable instruments for investors willing to hedge a portfolio of separate stocks.<\/p>\n\n\n\n

Quadruple Witching Dates<\/strong><\/h2>\n\n\n\n

All asset classes involved in quadruple witching expire four times a year, or once per quarter. This happens on the third Friday of March, June, September, and December.<\/p>\n\n\n\n

The exact time quadruple witching happens is at market close (3.00 to 4:00 pm EST).<\/p>\n\n\n\n

The quadruple witching dates for the years 2021, 2022, and 2023 are as follows:<\/p>\n\n\n\n