How a Quadruple Witching Affects Financial Markets

Quadruple witching, also known as quad witching, refers to the single day when contracts expire for stock options, stock index options, single stock futures, and stock index futures. These stock and index options and futures are called the 4 witches.

A single stock option is a contract between a buyer and a seller which gives the buyer the option to buy that amount of stock at a pre-agreed price, up until the expiration date. The buyer has no obligation to buy.

Stock index options work like single stock options except that they are tied to broad indexes, such as the S&P 500 index or the Dow Jones. Some stock index options are tied to specific industry sectors. Stock index futures are futures markets which are based on a broad index.

Single stock futures are futures which are based on individual stocks. Each single stock future is worth 100 shares of the individual stock. Single stock futures have lower commissions and lower margins than single stock options. They have only existed since 2002.

When so many contracts expire at the same time, a lot of money is spent simultaneously as traders exercise their stock or index options or tack delivery on their futures contracts. Because investors move around all that money in a single day, trading on that day is heavy and the markets are volatile. In 2007, both stock and options trading volume rose by 55-60% during quadruple witching days, compared to the daily average.

As a result, some strange things can happen to stocks during a quadruple witching. However, high volatility is usually limited to just a few stocks. Most stock market action is similar to non-witching days.

The effects of a quadruple witching also go beyond the main day. The expected volume of trading on Friday may result in a higher extrinsic value of further month options on the previous Thursday as well as on Friday.

Many longer term traders try to avoid trading during a quadruple witching. They prefer to trade on non-witching days, which also avoids frequent unnecessary stop outs. However, many daytraders and scalpers thrive on the volatility of a quadruple witching.

A common tactic used during a quadruple witching is to pin a stock to a particular price. This means that trading in the stock closes when the stock reaches a desired strike price, usually close to where the majority of the option activity is.

Before 2002, the term “triple witching” was used instead, because single stock options were not included. Quadruple witching occurs regularly on the 3rd Friday of March, June, September, and December.