Key Takeaways
- Simultaneous expiration of four derivatives quarterly.
- Triggers high volume and last-hour volatility.
- Creates short-term trading and arbitrage opportunities.
What is Quadruple Witching?
Quadruple witching refers to the simultaneous expiration of four types of derivatives: stock index futures, stock index options, stock options, and single-stock futures, occurring on the third Friday of March, June, September, and December each year. This event significantly impacts market dynamics by triggering high trading volumes and volatility, especially during the final trading hour known as the "witching hour."
It evolved from the earlier "triple witching," with the addition of single-stock futures after their introduction in 2002, making it a key date for traders managing expiring contracts and exercising early exercise decisions.
Key Characteristics
Quadruple witching is defined by distinct market behaviors and timing:
- Simultaneous expirations: Four derivative types expire together, combining stock options, stock index options, stock index futures, and single-stock futures.
- Scheduled quarterly: Occurs on the third Friday of March, June, September, and December, aligning with quarter-end market cycles.
- High trading volume: Often produces the highest daily volume of the year, fueled by contract settlements and position rollovers.
- Increased volatility: Price swings intensify, particularly during the last trading hour, due to rapid order flows and arbitrage activities.
- Liquidity surge: Enhanced market liquidity facilitates trade executions but can also lead to short-term price distortions, influenced by the law of supply and demand.
How It Works
On quadruple witching days, traders simultaneously close, exercise, or roll over expiring derivative contracts, creating a surge in market activity. This concentrated activity causes a spike in order flow and price fluctuations as participants adjust their portfolios to avoid unwanted exposure or to capture gains.
Options holders might opt for an call option exercise, while futures contracts either settle or transition to new expirations. This mechanism often leads to volatility spikes, with active traders leveraging margin accounts to capitalize on short-term movements.
Examples and Use Cases
Quadruple witching creates specific trading scenarios and opportunities, particularly for active market participants:
- Exchange-traded funds: ETFs like SPY, IVV, and QQQM often experience elevated volume, reflecting index-related option and futures expirations.
- Airlines: Companies such as Delta may see increased stock activity as traders adjust positions linked to expiring derivatives.
- Arbitrage opportunities: Traders exploit pricing discrepancies between underlying stocks and related derivatives to earn riskless profits during the heightened liquidity window.
Important Considerations
While quadruple witching can offer trading opportunities, it also introduces risks such as sudden price swings and execution challenges due to volatile order flows. You should be prepared for these conditions with appropriate risk management and awareness of market timing around expiration dates.
Long-term investors typically experience minimal impact, but understanding the event's influence on short-term price behavior can improve your trading decisions. Using margin carefully during these periods is advisable to avoid amplified losses.
Final Words
Quadruple witching triggers a surge in trading volume and short-term volatility, especially during the final trading hour of the quarter. If you trade options or futures, prepare by reviewing your positions ahead of the third Friday in March, June, September, and December to manage risk effectively.
Frequently Asked Questions
Quadruple witching is the simultaneous expiration of four types of derivatives—stock index futures, stock index options, stock options, and single-stock futures—occurring on the third Friday of March, June, September, and December each year.
It happens quarterly on the third Friday of March, June, September, and December, coinciding with the end of each financial quarter.
Because multiple derivatives expire at once, traders rush to close, exercise, or roll over positions, which floods the market with orders and leads to some of the highest trading volumes of the year.
Volatility often spikes, especially during the last trading hour known as the 'witching hour,' due to rapid order flows and price swings, although some sources note that high volume doesn't always mean proportionally higher volatility.
Active traders might use trend trading to capitalize on volatility, mean reversion to bet on price corrections, or arbitrage to exploit pricing mismatches between derivatives and underlying stocks.
Quadruple witching began in December 2002 after single-stock futures were introduced. Before that, the event was called triple witching, involving only stock options, stock index options, and stock index futures.
Generally, its effects are short-lived and mostly impact day traders and derivatives markets. Long-term investors usually experience minimal disruption.
The witching hour refers to the final trading hour on quadruple witching days when trading activity and volatility peak as traders finalize their positions.
