What is Quad Witching?

In the realm of financial markets, certain days stand out for their unique impact and significance. Among these, quad witching holds a prominent place, serving as a quarterly financial milestone. The term marks the concurrent quarterly expiry of four derivatives products.

Quarterly, quad witching brings a heightened level of activity and attention. Various derivative contracts reach their expiry, leading to notable shifts in trading strategies and market behavior. This event not only serves as a critical juncture for the market participants. It also offers a window into the intricate mechanics of market operations and the influence of time-bound financial instruments.

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Summary

  • Quad witching refers to the concurrent expiry of stock and index options, index futures, and single stock futures. This happens quarterly.
  • This event typically leads to heightened volume of trades and market volatility due to the large number of traders adjusting or closing their positions in these derivatives.
  • Quarterly derivative's expiry evolved from double witching, reflecting the growing complexity of financial markets and the introduction of various derivatives.
  • Traders often close out or roll over futures contracts during quarterly derivative's expiry. It's a period that requires careful strategy, including the use of stop loss orders and methods for managing risk.
  • This period can present short-lived arbitrage opportunities due to price discrepancies between futures and their base assets.
  • During quarterly derivative's expiry, the fluctuating market conditions and heightened exchange rates can have a ripple effect on the cryptocurrency sphere, impacting assets such as Bitcoin.

What is Quadruple Witching Day?

Quad witching day is distinguished by a surge in trading activity and marked volatility, as it coincides with the simultaneous expiration of four types of derivative contracts: stock index futures, stock index options, stock options, and single stock futures. This phenomenon occurs on the third Friday of March, June, September, and December.

Source: Finasko

This confluence of expirations triggers a flurry of activity among traders and investors who seek to adjust, roll over, or liquidate their positions. The overall activity of the speculators can impact stock prices and indices. Hence, Quadruple Witching Day offers both challenges and opportunities for market participants keen to capitalize on the shifts and trends that emerge during this critical financial event.

Contracts Involved in Quad Witching

As stated above, quad witching involves the concurrent expiry of four types of contracts. Each of these contracts plays a unique role in the financial markets, and their concurrent expiry leads to elevated levels of market transactions and market volatility.

Source: Finasko

Comprehension of these contracts is crucial for grasping the full impact of quarterly derivative's on the markets.

Stock Options

Stock options are pivotal in shaping market fluctuations. These contracts, offering the right to buy (call options) or sell (put options) a stock at a set price, play a crucial role on these days. When these options expire, typically on the third Friday of Mar., Jun., Sep., and Dec., the market often sees significant price adjustments.

For instance, if a large number of call options on a popular stock like Microsoft are in-the-money (where the market price is above the strike price), there could be a surge in buying activity as option holders exercise their rights. Conversely, if the market price is below the strike price (out-of-the-money), these options may be abandoned, resulting in a decreased buying activity.

Index Options

Index options, based on stock indices like the S&P 500, offer insights into broader market sentiments. These options are tools for speculation and hedging, reflecting the collective outlook on market sectors or the entire market.

On quad witching days, the expiry of these options can trigger portfolio rebalancing among institutional investors, influencing the stocks within the index. For example, a significant number of in-the-money index put options might indicate bearish sentiment, prompting selling pressure in the base stocks.

Index Futures

Index futures, agreements to buy or sell a financial index at a future date, are barometers of future market expectations. They are used for hedging and speculation on market directions. The expiry of these futures, especially when aligned with other derivatives on quad witching days, can lead to substantial market adjustments.

S&P 500, daily chart, of 2022. Notice volume spikes on quadruple witching days.

For example, if the futures on the NASDAQ-100 are indicating a downward trend, it might signal a bearish outlook, prompting traders to adjust their positions accordingly.

Single Stock Futures

Single stock futures, focusing on individual stocks, allow investors to speculate on specific company performances. The expiry of these futures can significantly impact the liquidity and pricing of the base stock.

For instance, if there's a high volume of futures on a company like Tesla expiring on a quad witching day, it could lead to notable price volatility as traders settle or roll over their positions.

However, it's important to note that with the closure of OneChicago at the end of 2020, there are no longer major markets for trading single stock futures in the United States. This closure has led to a decrease in the availability and popularity of such instruments in the American market, potentially affecting the strategies of speculators who previously actively utilized these financial instruments.

What Happens on Quadruple Witching Date?

Quadruple witching dates are characterized by distinct shifts in market behavior, primarily driven by the concurrent expiry of multiple derivatives contracts. Here's a closer look at the specific activities and market dynamics typically observed on these days:

  • Surge in Trading Volume: As the expiry of stock and index options, index futures, and single stock futures approaches, there's a noticeable increase in trading volume. This surge is fueled by market participants looking to close, adjust, or roll over their positions.
  • Market Volatility: Elevated levels of market transactions contributes to greater volatility in the markets. Prices of stocks and indices may experience more significant swings as a result of the large-scale unwinding and execution of positions. This volatility is not just confined to the base assets of the expiring contracts, but can also ripple across the broader market.
  • Impact on Liquidity: The quadruple witching day can lead to enhanced liquidity for certain stocks and indices. As speculators rush to execute their trades, the increased supply and demand dynamics can make it easier to buy or sell large quantities of securities.
  • Price Unpredictability: Alongside increased liquidity, there's also a heightened level of unpredictability in price fluctuation. The convergence of expiry can lead to unusual price patterns as speculators react to the evolving dynamics. This unpredictability requires those who are involved in the market to be particularly vigilant and adaptable.
  • Strategic Position Adjustments: Many traders and investors use quadruple witching days  to reassess and adjust their portfolios. This could involve closing out positions to avoid the risk of holding them post-expiry or strategically entering new positions to capitalize on the expected market fluctuations.

The History of Quadruple Witching

The roots of this date back to the 1970s, following the introduction of stock options in 1973 and stock index futures in the early 1980s. These developments led to the occurrence of double witching days, when both sets of derivatives expired concurrently.

In the 1980s, with the introduction of stock index options, the market dynamics shifted. This addition transformed double witching into triple witching, increasing the complexity of expiry days.

The next transition occurred in the early 2000s with the introduction of single stock futures. This new derivative added the fourth component, evolving triple witching into today's quadruple witching.

However, the landscape of quad witching has been impacted by market evolutions and regulatory changes over the years. Notably, the closure of OneChicago in 2020, a key platform for single stock futures in the United States, marked a significant shift. As a result of this closure, one of the four components — single stock futures —  is now less accessible and prevalent in the U.S. market.

This development has potentially reduced the intensity and market impact of these phenoms. But despite that, quad witching remains relevant, and its dynamics may evolve further as financial markets continue to adapt to new instruments and regulatory landscapes.

Closing and Rolling out Futures Contracts

On quad witching days, the financial markets witness a flurry of activity as traders make crucial decisions regarding their futures contracts. Many speculators close their positions by either executing the contract according to its terms or by settling it in cash, based on its current market value.

For example, a trader holding West Texas Intermediate (WTI) crude oil futures might choose to sell their position at the prevailing market rate, effectively closing their bet on oil prices.

Conversely, some traders opt to roll over their positions to a future date. It means they shift their investment to a similar contract with a later expiry. An example can be moving from a June to a September Dow Jones Industrial Average futures contract. This strategy is often employed to maintain a consistent market position or hedge against future price movements.

Arbitrage Opportunities

This period can present unique arbitrage opportunities for astute traders. Price discrepancies between futures and their base stocks or indices can emerge, offering a chance for profit.

For example, imagine a situation when a futures contract is trading at a significant discount or premium to the base asset. In this case, a trader might buy one and sell the other, aiming to profit from the eventual convergence in prices. However, these opportunities require quick action and sophisticated strategies, as they tend to be short-lived.

How to Trade Quad Witching on Freaky Friday?

Witching Fridays, known for their heightened activity on the market, present a unique set of difficulties and prospects for market participants. This period, marked by the concurrent expiry of multiple types of derivatives, creates a landscape ripe for strategic trading, but it also demands a high level of market savvy and caution.

In this section, we explore the intricacies of trading during these eventful days, offering insights into how traders can navigate the turbulent waters of quad witching to potentially capitalize on the opportunities it presents while managing the inherent risks.

Is it Tradable?

Quad witching, while presenting unique challenges, offers tradable opportunities for those who understand its nuances. The key lies in dealing with the increased price fluctuations of market instruments and the heightened trading volume typical for these days.

Successful trading during derivatives expiry requires an acute awareness of how the concurrent expiry of different derivatives can impact market behavior. Traders must be prepared for rapid price shifting and be adept at identifying both the risks and prospects that arise.

How to Find Trading Levels

Identifying effective trading levels during derivatives expiry involves analyzing market trends, scrutinizing volume indicators, and delving into historical data. Traders often look for established patterns or levels where the market has previously shown support or resistance. These historical points can serve as critical guides for determining entry and exit positions. For instance, a trader might observe the behavior of the S&P 500 index during previous quad witching days to identify potential resistance levels that could inform their trading strategy.

Stop Loss Orders and Risk Management

The increased market fluctuations of quad witching necessitates rigorous risk management. Implementing stop loss orders is a fundamental strategy to mitigate potential losses. These orders automatically sell a security when it reaches a certain price, thus limiting the trader's exposure to a falling market.

Additionally, a robust risk management plan is essential. This plan should include predefined risk thresholds and a clear comprehension of the trader's risk tolerance. For example, a trader might decide to only risk a certain percentage of their portfolio on trades during derivatives expiry. Thus, they can ensure that they are not overly exposed to the day's volatility.

Market Impact of Quadruple Witching

The market impact of this phenomenon is significant, affecting not only the derivatives markets but also the broader financial markets, including equities and, to some extent, cryptocurrencies.

How Quadruple Witching Affect On Crypto

The impact can extend beyond traditional financial markets to impact cryptocurrencies like Bitcoin. Although the crypto market operates differently, the surge in trades and volatility in instruments in traditional markets during derivatives expiry can influence investor sentiment and trading behavior in the crypto space.

U.S. Dollar Index (DXY)

The U.S. Dollar Index (DXY), which measures the value of the U.S. dollar against a basket of foreign currencies, can also be impacted by quadruple witching. The adjustment of positions in currency-related derivatives made by traders can lead to fluctuations in the DXY, reflecting broader market sentiments.

Real-World Example of Quadruple Witching

A tangible illustration of quadruple witching's impact was vividly demonstrated on June 18, 2021. This date marked one of the quintessential quad witching days. The market dynamics on this day were a textbook example of the heightened activity typically associated with this period.

Source: Bloomberg

On June 18, the trading volume surged significantly, with the market witnessing an influx of transactions as traders adjusted their positions in response to the expiring contracts. Notably, the S&P 500 experienced considerable fluctuations, reflecting the broader market's response to the expiry. The index oscillated between gains and losses, showcasing the increased market instability that is a hallmark of quad witching days.

What Are the Quadruple Witching Dates for 2023?

The quad witching dates for 2023 are as follows:

  1. Mar. 17, 2023
  2. Jun. 16, 2023
  3. Sep. 15, 2023
  4. Dec. 15, 2023

These dates mark periods when increased vigilance and strategic adjustments are often necessary due to the potential for significant market movements associated with the expiry of multiple derivatives.

Quad Witching Dates for 2024

Looking ahead to 2024, the quad witching dates are set for:

  1. Mar. 15, 2024
  2. Jun. 21, 2024
  3. Sep. 20, 2024
  4. Dec. 20, 2024

As in previous years, these dates, also landing on the third Fridays of their respective months, are anticipated to be times of heightened activity on the market. It's crucial for market participants to be aware of these dates well in advance. They need to prepare and adapt their trading strategies.

Conclusion

Quad witching is more than just a regular market event; it's a testament to the complexity and interconnectedness of modern financial markets. Comprehension of the intricacies of this phenomenon is undoubtedly crucial for those involved in the market, as it affects not only derivatives but also the broader stock and even cryptocurrency markets.

Increased price swings of popular market instruments and the elevated volume of transactions on these days present both difficulties and prospects. Successful navigation of quad witching requires a deep comprehension of market dynamics, a keen eye for strategic opportunities, and a robust approach to risk management. As the financial markets continue to evolve, quad witching remains a pivotal event that encapsulates the rhythm and pulse of global trading activities.

FAQ

What Is Witching, and Why Is It Quadruple?

Witching refers to the expiry of derivatives, and it is termed 'quadruple' due to the concurrent expiry of four types of instruments: single stock futures, stock and index options contracts, and also index futures.

When Does Quad Witching Day Occur?

This phenomenon takes place annually on the third Friday of the last month of the quarter.

Why Do Traders Care About Quadruple Witching?

Investors closely monitor quad witching due to its tendency to amplify market fluctuations and exchange intensities, which can bring about both potential hazards and prospects.

What Are Some Price Abnormalities Observed on Quadruple Witching?

During quarterly derivative’s expiry, some common price abnormalities include significant spikes in trading volume, erratic changes in prices, and temporary mispricings, which can provide arbitrage opportunities.

Is Quadruple Witching Bullish or Bearish?

While the surge in activity during quarterly derivative's expiry can lead to substantial changes in prices, the direction of the movement largely depends on the prevailing market conditions and investor sentiment. As such, quadruple witching should be viewed more as a period of potential market unpredictability rather than a predictor of a specific market direction.

*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.

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