Quadruple witching day - definition and time that it occurs

Quadruple witching day

The quadruple witching days are the quarterly expiration days of four derivative products:

  • index options
  • index futures
  • stock options
  • equity futures

This simultaneous expiration event occurs four times a year, on the third Fridays of March, June, September and December. Specifically, during the last hour of the trading session (3:00 p.m. - 4:00 p.m. local New York time).

The triple witching day is the third Friday of the other months, where only three derivative products expire:

  • index options
  • index futures
  • stock options

On these days, the expirations typically increase the trading volumes of options, futures and their underlying stocks, and sometimes increase the price volatility of the involved securities.

During this day, many traders strive to close and hedge their futures and options orders before they expire. Due to the massive volumes and rapid movements in all directions of various trading instruments, the market can become volatile and unpredictable in the short term.

Implications of the "quadruple witching day"

The "quadruple witching days" generate a great deal of volatility and activity in the markets, because contracts that are about to expire may require the purchase or sale of the underlying security. On these days, especially in the last trading hour before the closing bell, an increase in activity and volatility can occur when traders close, renew or hedge their expired positions.

The high volumes observed during this period can lead to increased volatility, which presents opportunities for certain operators. A trader with a variety of short-term equities that could be affected by the quadruple witching day should be aware of the risks and the strategies in order to mitigate them. Otherwise, it is more appropriate to withdraw from the market before this event.

Effects on the market

The futures markets sees very large transactions and considerable volumes during the last trading hour. Market participants who trade must decide whether to renew their futures contracts and hold a position in an unexpired contract, or to liquidate their futures position, which they could buy or sell, depending on the direction of the initial transaction.

Option traders also determine whether their options are going to expire in the money or out of the money. On these days, market participants with large positions in these contracts may have financial incentives to try to temporarily push the underlying market in a certain direction to affect the value of their contracts. Expiration forces operators to act before a certain day, which increases the trading volumes on the relevant markets.

It is often said that quadruple witching day causes volatility within underlying markets and expired contracts, both during the previous week and on the expiration date. In some cases this may be true, but sometimes it can also be a fairly calm event, with less volatility and an upward statistical bias during the week in which this event occurs and during the actual event itself.

Compensation of positions on the futures markets

A futures contract is an agreement to buy or sell an underlying security at a predetermined price and on a specific future date. It requires that the agreed transaction take place after the expiration of the contract. For example, a Standard & Poor's 500 (S&P 500) index futures contract has a value of 250 times the value of the index. If the index has a price of $2,000 at the time of expiration, the underlying value of the contract is $500,000, which is the amount that the owner of the contract is required to pay if the contract reaches expiration.

To avoid this obligation, the owner of the futures contract closes the contract by selling it before it expires. After the expiration of the contract, the exposure to the S&P 500 index can be maintained by purchasing a new futures contract on the same underlying asset, but with an expiration date that is latter in the future. This is called the extension of a futures contract.

Options that expire

Options that are "in the money" (options that are profitable) present a similar situation for traders who have expiring contracts. For example, the seller of a hedged call option may be required to deliver the underlying shares in his possession if the share price closes above the expiration price of the option. In this situation, the seller of the option has the option to close the position before expiration to continue to hold onto the shares, or to let the option expire and therefore have to deliver the underlying shares.

Quadruple witching day and arbitrage

The increased activity during the quadruple witching days can also generate price inefficiencies, which leads to short-term arbitrage possibilities. These opportunities are often the catalysts for large trading volumes at the close of these days, as traders try to take advantage of small price imbalances through short-lived trades with large trading volumes that can be completed in just a few seconds.