What Is Quadruple Witching?
Update: Next Quadruple Witching Date is 15 December 2023.
Quad Witching is a significant stock market event that happens 4 times a year on the 3rd Friday of March, June, September, and December. These days, four major derivative contracts – Stock Options, Stock Futures, Stock-Index Options, and Stock Index Futures – expire simultaneously.
The word “Witching” refers to a time when supernatural or ominous forces are active. On the derivatives expiry day, big players are very active as they adjust their existing positions by exiting, rolling over, or entering new positions.
That kind of above-average activity can lead the higher volume & liquidity for trading which may trigger unusual price moves. However, it’s important to note that higher volume does not necessarily result in increased volatility, as measured by the VIX index.
Important Note: In the United States, trading stock futures was discontinued in 2020, resulting in only three instruments expiring on the same date, known as “Triple Witching.” However, the terms “Quadruple Witching” and “Triple Witching” can be used synonymously.
Quadruple Witching Dates (2023-24)
Quadruple Witching days occur at the end of every quarter on the 3rd Friday of March, June, September, and December. Upcoming Quad dates include:
What is the Expiry of Different Contracts?
As previously mentioned, there are four Derivatives Contracts set to expire on Quadruple Witching. Here is a quick introduction to these components…
#1 Index Options
Index options are financial instruments that grant the holder the right to purchase or dispose of a set of underlying assets, referred to as an index, at a predetermined cost on a particular date.
#2 Index Futures
Index futures are financial derivatives contracts that allow investors to speculate on or hedge against the future value of a stock market index. Moreover, they involve the buyer agreeing to purchase, or the seller agreeing to sell, the underlying index at a specified price on a future date. Additionally, index futures are used for risk management and speculative trading.
#3 Stock Options
As the name suggests “Stock Options” are contracts that give the holder the right to buy or sell a specific number of shares of stock at a specific price within a set time period.
There are two types: Call options, which allow buying the stock, and Put options, which allow selling the stock. They can be used as investments or as a way for companies to attract and retain employees.
#4 Single Stock Future
Single stock futures (SSF) are financial contracts that allow investors to speculate on the future price of a specific stock.
They are similar to options in that they give investors the ability to gain exposure to price movements in the underlying stock, but unlike options, SSFs require the investor to take physical delivery of the stock at the expiration of the contract. SSFs are no longer available for trading after 2020.
How Expiry of Different Contracts Increase Volume?
As we know, Quadruple Witching days tend to result in increased market activity due to the fact that investors and traders are required to close out their hedge positions and settle a large number of contracts.
Additionally, if they wish to maintain their positions beyond the expiration date of their current contracts they can roll over the existing positions by selling their expiring contracts and entering into new ones. These actions can lead to increased volume, commonly referred to as the “Expiration Effect“.
How to Trade on Quadruple Witching Day?
As a professional trader, you may be asking yourself the following 3 questions in order to effectively navigate trading during this potentially volatile period:
#1 Understand What’s Happening on Quad Witching Day?
Generally, on expiry day, market movements are predictable based on the huge open interest data. The prices are generally flat and movement is in accordance with the data.
But when there is any significant event like Inflation Data Release or Fed Rates announcements or for any other reason prices move against the large derivative positions, the market can show sudden volatility as many big players may get caught on the wrong side and are forced to exit or adjust their positions as the expiry is near and they are placed on the wrong side.
Some traders and investors may find this stressful; therefore, they must monitor market developments and prepare for the potential impact of any sudden changes in volatility.
#2 Is Market Bullish or Bearish On Quad Witching Days?
look Quadruple witching days are not always necessarily bullish or bearish and they can be affected by global events, economic and political news, and other factors.
To gain a more in-depth understanding, you can examine the historical market performance of Quad Witching Day in March (Q1) on different indices over the past 40 years…
#3 What Are The Trading Strategies For Expiry?
If possible, it may be wise to proceed with caution or avoid trading on Quad Witching Day. However, if you do choose to trade or have existing positions, the following strategies may be considerable.
- Hedging: Use financial derivatives to hedge your position against sudden price movements.
- Stop-Loss: Set stop-loss (SL) and adjust positions to avoid big potential losses.
- Avoiding New Positions: To minimize risk and fluctuations, refrain from opening new positions unless you are a professional trader or hedge fund manager
By understanding the concept of Quadruple Witching, it is crucial to keep an eye on market conditions and carefully assess the current state of the markets before engaging in any trades on Quadruple Witching days. Additionally, having a well-crafted risk management plan and a clear understanding of your investment strategy is also key to achieving success during these market events.
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