In markets, certain events can have a significant impact on trading volumes and market volatility. One such event is known as quadruple witching or, more accurately in today’s context, triple witching.
This phenomenon, which occurs four times a year, refers to the simultaneous expiration of three major types of derivatives contracts:
- stock options
- index futures, and
- index futures options
Originally, quadruple witching included a fourth type of contract, single-stock futures, but this contract hasn’t traded in the US since 2020 (and single-stock futures were never much of a factor, hence why they were phased out).
As a result, the term “triple witching” has become more appropriate, though both terms are still commonly used interchangeably.
Key Takeaways – Quad Witching (Triple Witching)
- Triple witching (previously quad witching) refers to a date on which three different classes of securities expire simultaneously: stock options, stock index futures, and stock index options.
- Triple witching occurs four times a year, on the third Friday of March, June, September, and December, and can lead to increased trading volumes and market volatility, particularly during the “witching hour” of the last hour of trading.
- Traders can employ various strategies to take advantage of the increased activity and volatility during triple witching, such as arbitrage, straddles, portfolio hedging, or trend-following, but should be aware of the risks and carefully consider their risk tolerance and investment objectives before engaging in any trading activity.
When Quad Witching / Triple Witching Occur
Triple witching takes place on the third Friday of March, June, September, and December.
These days have higher trading volumes, particularly during the last hour of trading, as traders adjust their positions and manage risk in their portfolios.
How Long Does Quad Witching (Triple Witching) Last
Quad witching, or triple witching as it is more accurately called today, is a one-day event that takes place on the third Friday of March, June, September, and December.
The increased trading volumes and market volatility associated with triple witching are typically concentrated in the last hour of trading, often referred to as the “witching hour.”
During this time, traders and investors hurry to close out, roll over, or adjust their positions in the expiring contracts, leading to greater activity in the market.
It is important to note that while the actual triple witching day is a single-day event, the days leading up to it can also experience increased trading volumes and market fluctuations.
Market participants may begin making adjustments to their portfolios in anticipation of the event, causing a ripple effect that can be felt throughout the week.
As a result, some investors and traders may refer to the entire week in which triple witching occurs as “triple witching week.”
Why Is Quadruple Witching (Triple Witching) Important?
Triple witching is significant for a few reasons.
Higher trading volumes & liquidity
First, it leads to increased trading volumes, which can result in higher liquidity levels in the market.
This heightened liquidity can make it easier for traders to enter and exit positions, potentially improving the efficiency of the market as a whole.
Secondly, the simultaneous expiration of multiple derivatives contracts can lead to increased market volatility, as traders adjust their positions.
This can create unique opportunities for short-term traders who thrive on market fluctuations and seek to profit from them.
Effects on prices
Lastly, triple witching can impact the prices of the underlying assets, as the rebalancing of portfolios can lead to shifts in supply and demand dynamics.
This can have both short-term and long-term implications for investors and can influence overall market sentiment.
Quad Witching Day Strategies
Navigating the increased volatility and trading volumes during triple witching can be challenging for both experienced and novice traders.
However, there are several strategies that can be employed to take advantage of the market fluctuations:
Traders can capitalize on price discrepancies between related securities or derivatives contracts, buying low and selling high to profit from the temporary mispricings.
By purchasing both call and put options on a stock, traders can profit from significant price movements in either direction, potentially taking advantage of the increased volatility.
Investors can use options and futures contracts to hedge their existing positions, protecting their portfolios from potential losses due to market fluctuations during triple witching.
Riding the Trend
Traders can attempt to identify and follow short-term trends in the market, entering and exiting positions as needed to capitalize on the heightened market activity.
This is often called momentum.
Quad Witching vs. Triple Witching
The terms “quad witching” and “triple witching” are often used interchangeably.
But as mentioned above, quad witching originally referred to the simultaneous expiration of four types of derivatives contracts: stock options, index futures, index futures options, and single-stock futures.
Since single-stock futures have not been a factor in the US market since 2020, the term “triple witching” has become more accurate, as it reflects the simultaneous expiration of the three remaining contract types.
While both terms still appear in financial literature and discussions, it is essential to recognize that the phenomenon currently experienced in the market is more accurately described as triple witching, and quad (quadruple) witching is now a legacy term.
Quad and Triple Witching Explained – Stock Market Derivative Expirations
FAQs – Quad Witching
What happens during quad witching (triple witching) day?
On triple witching day, three types of derivatives contracts – stock options, index futures, and index futures options – all expire simultaneously.
This creates a flurry of activity in the market as traders and investors close out, roll over, or adjust their positions in the expiring contracts.
As a result, trading volumes increase, particularly during the last hour of trading, known as the “witching hour.”
This heightened activity can lead to increased market volatility and potentially impact the prices of the underlying assets.
Is quad witching bullish or bearish?
Triple witching is neither inherently bullish nor bearish.
The increased trading volumes and market volatility that accompany triple witching can create opportunities for both long and short positions, depending on the specific market conditions and underlying assets.
The direction of the market on triple witching day depends on various factors, such as macroeconomic news, corporate earnings, and shifts in investor/trader sentiment.
Do stocks go up or down on quadruple witching day?
There is no definitive pattern in stock price movements on triple witching day. The market’s direction is influenced by a multitude of factors.
While some studies have suggested a slight upward bias on triple witching days, the impact can vary widely depending on the specific stocks and market conditions.
It’s important for traders/investors to consider a broader range of the cause-effect relationships governing market movements rather than rely solely on historical patterns or trends.
When does triple witching occur?
Triple witching takes place on the third Friday of March, June, September, and December.
How does triple witching affect market volatility and trading volumes?
Triple witching typically leads to increased trading volumes, particularly during the last hour of trading, as market participants adjust their positions in the expiring contracts.
This heightened activity can also result in increased market volatility, creating opportunities and risks for traders.
Can triple witching impact the prices of individual stocks?
Yes, the rebalancing of portfolios during triple witching can lead to shifts in supply and demand dynamics, potentially impacting the prices of individual stocks.
However, the impact on any specific stock will depend on various factors, including its weighting in indices, discounting of fundamentals over the timeframe, and the overall market conditions.
Are there specific strategies for trading on triple witching days?
Some traders employ strategies such as arbitrage, straddles, portfolio hedging, or trend-following to take advantage of the increased market activity and volatility during triple witching.
However, it’s important to recognize the inherent risks associated with these strategies. One’s risk tolerance and investment objectives are important to have in mind before engaging in any trading activity.
Triple witching (fka quad witching or quadruple witching) refers to a date on which three different classes of securities, namely stock options, stock index futures, and stock index options, all expire on the same day.
This event occurs four times a year, on the third Friday of the months of March, June, September, and December.
On triple witching days, there is typically a higher volume of trading in these securities as investors adjust their positions in response to the expiration of these contracts.
In addition, traders who have sold options or futures contracts that are expiring may need to take action to fulfill their obligations, such as buying or selling the underlying securities.
This can also contribute to increased trading activity and volatility in the underlying stocks and indices on triple witching days.
Overall, triple witching days can be important events for traders and investors to monitor, as they may provide opportunities for profit or require careful management of risk.