What is Quadruple Witching Day? What is the effect of Quadruple witching day on the market
Quadruple Witching - Definition
The third Friday of March, June, September and December when Index Futures, Options on Index Futures, Single Stock Futures and Stock Options
reach their final trading day.
Quadruple Witching - Introduction
Quadruple Witching days, also known as Quad Witching, are the four days in a year where the combined effects of derivative traders exercising their
in the money options
and taking delivery on their
futures contracts as well as
traders practising arbitrage made Quadruple Witching one of the most turbulent and heavily traded days of the year.
Quadruple witching is one of the most important days to take note of in options trading and
this tutorial will discuss why it happens and how it affects your options trading.
How Does Quadruple Witching Occur?
Quadruple Witching occurs as 4 different types (hence the term "Quadruple") of
derivative instruments reach their final trading day on the very same day. In the US market,
the final trading day for
stock options is
every third Friday of each month while the final trading day for single stock futures, options on index futures and certain index futures
occurs every third Friday of the quarter; Third Friday of March, June, September and December. The combined expiration of these four derivative instruments creates the Quadruple Witching day.
Quadruple Witching only begun after 2001.
Prior to the trading of Single Stock Futures in 2001, there was only Triple Witching where stock options, index futures and options on
index futures expire on the third Saturday of every quarterly month.
What Effects Does Quadruple Witching Have?
Due to the combined effects of exercise, delivery,
hedging,
arbitrage
as well as speculative
options trading and futures trading activity during Quadruple Witching days, the most obvious effect is a dramatic
increase in trading
volume. In fact, it has been documented that in 2007, both stock and options trading volume during Quadruple Witching days
rose by about 55% to 60% more than the
daily average for the year.
Even though there might be increased amount of
volatility in certain stocks during Quadruple Witching, the overall
stock market action does not look significantly different from a normal non Quadruple Witching day. In fact, for the year 2007, the average move made by the S&P500 on Quadruple Witching days is only 0.79%, which is not significantly higher or lower than normal trading days.
Extrinsic value of further month options
may be slightly higher than usual on the Thursday prior to Quadruple witching and on Quadruple witching Friday itself due to the increased
amount of trading. Due to the increased intraday volatility, options traders holding longer term options positions using
trailing stop loss
or contingent orders may also experience unnecessary stop outs.