What is Quadruple Witching?
The term “quadruple witching” refers to the simultaneous expiration of four distinct types of derivative contracts: stock index futures, stock index options, stock options, and single stock futures. This event takes place four times a year on the third Friday of March, June, September, and December. Despite its evocative name, the occurrence is not supernatural but is met with significant market activity—because single stock futures ceased trading in the U.S. in 2020, making it de facto “triple witching” now. The heightened trading volume, especially in the last hour of trading, is attributed to traders adjusting their portfolios.
Key Takeaways
- Quadruple witching refers to the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures four times a year.
- Since single stock futures stopped trading in the U.S. in 2020, it is now effectively “triple witching.”
- This takes place on the third Friday of March, June, September, and December.
- Trading volumes generally spike on these days as traders adjust positions and roll contracts over.
- Despite heightened activity, it doesn’t necessarily result in increased market volatility.
Quadruple Witching Dates
Financial markets see quadruple witching on the third Friday of March, June, September, and December. Here are the upcoming dates:
- For 2024: March 15, June 21, September 20, December 20
- For 2025: March 21, June 20, September 19, December 19
- For 2026: March 20, June 19, September 18, December 18
During the last hour of trading on these days, known as the quadruple witching hour, market activity typically rises as traders adjust positions and roll over contracts.
Understanding Quadruple Witching
Four derivative contracts account for the “quadruple” in quadruple witching: stock index futures, stock index options, stock options, and single stock futures. While single stock futures now trade only outside the U.S., the closely-timed expirations of index futures, index options, and stock options can make for active trading days.
Contrary to the mystical term, there’s nothing magical about quadruple witching. It results from market makers’ activities as they unwind the hedge positions against expiring stock and index options. In turn, this generates large volumes of trading, enhanced by the rolling over of contracts.
Types of Contracts Involved in Quadruple Witching
Stock Options
Stock options are derivative contracts that grant the buyer the right, but not the obligation, to buy or sell stock at a predetermined price before the option expires. They include call options (benefit from price increases) and put options (benefit from price decreases). Expirations happen on the third Friday of each month.
Index Options
Index options derive value from an equity index. Unlike stock options, these are cash-settled and are generally European-style, meaning they can be exercised only on the expiration date.
Index Futures
Futures contracts bind the buyer to purchase assets at a future date at an agreed-upon price. Index futures are also cash-settled and can be used to hedge a portfolio of stocks. They trade on futures exchanges with specified contract specifications.
Single Stock Futures
These are obligations to buy or sell a single stock at a specific price on the contract’s expiration date. Each contract typically represents 100 shares. Although they no longer trade in the U.S., their impact compared to other contracts has historically been minimal.
Market Impact of Quadruple Witching
The simultaneous expirations often lead to increased trading volumes, though not necessarily increased volatility. The trading volume spike is partly due to the automatic exercise of in-the-money options, leading to buying or selling of the underlying shares to settle the positions.
Closing and Rolling out Futures Contracts
Most activity on quadruple witching days focuses on closing or rolling out (extending) positions. For instance, traders holding E-mini S&P 500 futures can choose to close contracts at the prevailing price or roll them forward to a future settlement date.
Arbitrage Opportunities
Large contract blocks can move prices, offering arbitrageurs opportunities to profit from temporary price distortions by making repetitive trades. However, the potential for gains is accompanied by significant risk of losses.
Pros
- Arbitrage opportunities due to temporary price distortions
- Increased trading volume can drive modest market gains
Cons
- Potential for losses from rapid price shifts
- Modest market gains on average
Real-World Example of Quadruple Witching
Before notable quadruple witching dates, trading activities tend to increase. For instance, on March 15, 2019, trading volumes spiked to 10.8 billion shares, significantly higher than the average in preceding non-quadruple witching days. This heightened activity highlights the effect, though disentangling actual market gains attributable to these expirations is complex.
Frequently Asked Questions
What Is Witching and Why Is It Quadruple?
In folklore,
Related Terms: triple witching, stock options, index futures, index options.
References
- The Options Clearing Corporation. “2021 Year in Review”.
- The Options Industry Council. “Options Basics”.
- Chicago Board Options Exchange. “Getting Started with Index Options”.
- U.S. Securities and Exchange Commission. “Futures Contract”.
- CME Group. “Cash-Settled Future Prices”.
- U.S. Securities and Exchange Commission. “Single Stock Futures: An Alternative to Securities Lending”, Page 1-4.
- U.S. Securities and Exchange Commission. “Investor Bulletin: An Introduction to Options”.
- CME Group. “E-mini S&P 500”.
- CME Group. “Conclusion of Standard S&P 500 Futures and Options Trading”.
- Reuters. “Wall Street Gains With Tech; S&P 500 Posts Best Week Since November”.
- CME Group. “Understanding Listings and Expirations”.
