What is Quad Witching?
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Quadruple witching refers to the third Friday of March, June, September, and December, when stock index futures, stock index options, single stock options and single stock futures expire at the same time. Traders must offset, close, rollout or deliver on their positions, which creates above-average volume and volatility during the last hour – or witching hour.
For example, more than 10 billion shares traded hands on Friday, September 21, 2018, which is about 65 percent higher than the three-month average. The prior quadruple witching on June 15 similarly saw a 75 percent increase in trading volume to 3.5 billion shares. Despite the large amount of volume and volatility during these sessions, the S&P 500 was little changed in both cases – the event is temporary in nature.
Let’s take a closer look at the quadruple witching phenomena, how it impacts investors, and what it means for your portfolio.
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Quadruple Witching 101
The origins of “witching” are unknown. Some experts suggest that it may have originated from the three witches in Shakespeare’s Macbeth. Others believed that it may simply refer to “witchcraft” in the sense that the high level of volume and volatility can seem surreal at times.
The “quadruple” prefix stems from the fact that there are four different types of contracts expiring at the same time: Stock index futures, stock index options, single stock futures and single stock options. As you might guess, “double witching” and “triple witching” refer to two and three contracts expiring at the same time, respectively.
Quadruple witching occurs on the third Friday of March, June, September and December when all four contracts expire at the same time. Equity volume and volatility tend to be much higher than double or triple witching days, but any witching sessions still have above-average volume and volatility compared to average market sessions.
The last hour of trading on a quadruple witching day is known as the “witching hour” – a time when most of the volatility and volume occurs.
What Happens During This Time?
Quadruple witching is characterized by wide-scale portfolio rebalancing ahead of and following contract expirations.
Traders holding in-the-money options experience automatic transactions between buyers and sellers. For instance, a call option is usually written against stock in the seller’s portfolio. If the option expires in-the-money, this stock is called away at the strike price and sent to the buyer.
In some cases, traders may want to avoid assignment and roll-out their contracts. A futures trader holding S&P 500 E-mini contracts that are in-the-money may rollout the contract to the next month to avoid delivery. Traders may also close out these contracts by settling the difference with the buyer.
Arbitrageurs take advantage of pricing discrepancies that arise when large blocks of contracts influence the price. Since these movements are driven by temporary supply and demand rather than fundamental change, there may be an opportunity to purchase stock at a discount or sell stock at a premium.
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How Does It Impact Traders?
The impact of quadruple witching depends on the individual trader and their portfolio.
Quadruple witching primarily impacts the equity market, but the volatility can spill over into other markets. For example, an unexpected change in U.S. trade policy could cause a sudden market decline and trigger unexpected losses in stock index futures – and that could prompt investors to sell assets in other markets to cover those losses.
Long-term investors don’t have to worry about quadruple witching since there is very little long-term impact. The temporary volatility is evened out by arbitrageurs and the long-term price trends remain intact. As a result, investors usually tune out the news and focus on their long-term goals rather than watching the short-term volatility.
Short-term traders should be cognizant of the above-average volatility, which can prematurely trigger stop-loss orders. In addition, there may be short-term arbitrage opportunities in some markets to consider, although institutional investors tend to capitalize on these most efficiently.
The Bottom Line
Quadruple witching refers to the simultaneous expiration of stock index options and futures, as well as single stock options and futures, on the third Friday of March, June, September and December. These days are characterized by above-average volume and volatility that can impact short-term traders.
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