What Is Quadruple Witching?

By Matthew Zeitlin · June 21, 2021 · 4 minute read

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What Is Quadruple Witching?

For many investors, the spookiest day of the year isn’t Halloween, but the third Friday in March, June, September, and December. The last hour of those trading days is known as the “quadruple witching hour”, when many derivatives contracts expire, often creating volatility in the markets.

That’s because there may be higher market volume on those days as traders either close out or roll over their positions.

What is Quadruple Witching Day?

Quadruple witching, or quad witching, is trader’s terminology for the four dates on the calendar when four kinds of options contracts expire: stock options, stock index futures, index options, and stock futures.

Each of the contracts has expiration dates that will match up each quarter, which is why quadruple witching, or quad witching, happens in the third, sixth, ninth and twelfth month of the year respectively. The expiration for these contracts happen at the same time in the day — the afternoon.

While events like quadruple witching may not impact how and when you invest (especially if you’re investing for the long term), they are a good reminder of the investment risks that any investing strategy or approach brings.

How much attention individual investors pay to witching day may depend on their investing philosophy and their time horizon. Since quad witching can result in short-term volatility, many passive investors may ignore them entirely. On the other hand, active investors who try to time the market and get in and out of trades quickly in the most advantageous manner, may use them to inform their strategy and consider buying or selling witching hour stocks.

Recommended: Is it Possible to Time the Stock Market?

Contracts Involved in Quad Witching

To understand quadruple witching, you have to first understand the different options contracts involved. Stock index futures, stock index options, single stock futures and single stock options are all derivatives, meaning their value corresponds to the value or change in value of an underlying asset. The underlying assets are either stock market indexes, like the S&P 500, or individual company stocks.

Options contracts give holders the right, but not the obligation, to buy or sell a stock at a certain price at a future date. Futures contracts are contracts to purchase shares of a given stock at a certain price in the future.

For indices, futures and options are contracts on the value of an equity index. Investors often use these either to hedge or make outright speculations on the moves of an index. All four derivatives are complex investments that involve risks when playing the market, and they’re more often used by professional traders and institutional traders than retail investors.

How Does Quadruple Witching Affect the Market?

Quadruple witching days are those four days of the year when these types of contracts all expire, those who bought contracts and choose to exercise them will receive their stock or cash, or they make additional transactions to take advantage of arbitrage opportunities.

This can lead to more buying and selling of shares than is typical for a given day or, especially a given hour. Increased volume can mean more volatility in the markets and the possibility of large swings during the day.

One reason these days can cause hiccups in the markets is that while certain positions expire, investors may want to extend them. This means they have to “roll” the bet in order to keep it active, potentially forcing other players in the market to buy or sell, especially if the market is already volatile or choppy.

For trades that involve the transfer or automatic buying of stock, like options trades on individual shares, the quadruple witching date can mean automatic buying up of shares to fulfill the options contracts, leading to spikes even if there is no “fundamental” reason for them.

Overall, volumes in options trades can go up on quadruple witching days, which can sometimes have knock-on effects on the price of the underlying assets involved in options contracts.

The Takeaway

Quadruple witching offers an opportunity to understand how market mechanics can affect actual prices, but it may not impact the strategy for most long-term investors. Regardless of your approach, it helps to have a savings and investing plan that you have confidence in and that matches up with your long term goals. The SoFi Invest investing platform offers a wide range of assets to invest in, with personalized advice and automatic investing.

If you’re more interested in active investing, whether it’s quadruple witching day or not, SoFi Invest can help with that too, with free ETF and stock trades. With StockBits, you don’t even have to purchase a whole share in order to start investing and trading, SoFi Invest offers fractional shares.

Photo credit: iStock/Radachynskyi

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