Quad Witching Day Bullish or Bearish? Quadruple Witching Backtest

It is an important metric for traders to watch since a large amount of open interest can move the value of the underlying stock. Despite the overall increase in trading volume, quadruple witching days do not necessarily add to market volatility. Quadruple witching day is when four different derivative contracts expire on the same day, forcing traders to take action on these trades.

Stock Futures

Since quadruple witching doesn’t seem to have a direct impact on market volatility, it doesn’t necessarily affect the prices of the underlying stocks. Since these are derivatives and mostly futures contracts, quad witching doesn’t add volatility to the stock market like some would assume. Futures traders can take long and short positions around the clock from Sunday evening through Friday afternoon. If they want to keep a position through quarterly expiration, they must sell the expiring contract and buy into the newer contract. This so-called “rolling” is a big reason for the heavy volume on quad witching days. Amidst the Quad Witching convergence, the expiration of stock options adds a layer of granularity to the market’s narrative.

Quadruple Witching Hour

The first quadruple witching date was the third Friday of December 2002, as single stock futures commenced trading on November 8, 2002. During quadruple witching periods, traders may employ a variety of strategies, such as delta-hedging and setting stop-loss orders to manage risk. They also might capitalize on the increased volume by seeking out trading opportunities.

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1. The strike price is the price at which a derivative contract can be exercised, and it’s crucial during Quad Witching as multiple options converge to their expiration.
2. The value of the underlying index relative to the option contract’s strike price is what determines an index option trade’s profitability.
3. Quadruple witching days occur on the third Friday of the third month in each quarter.
4. Have you ever seen a stock exhibiting normal trading behavior and then all of a sudden the stock price drastically drops out of nowhere?

These are referred to as “quadruple witching days” because four major derivatives contracts expire simultaneously. Individual large-cap stocks, particularly market movers like Apple and Tesla, attract extra attention during Quad Witching. These stocks might witness increased volume and price swings as investors and traders execute strategies around their options and futures contracts. These stocks have significant weight in indices, so their movements can disproportionately affect the entire market. For example, movements in Apple’s stock during Quad Witching can influence the direction of the S&P 500 and NASDAQ Composite.

The four different contracts are index futures, index options, stock futures, and stock options. Quadruple witching refers to a date where stock index futures, stock index options, stock options, and single stock futures expire simultaneously. Should investors plan to buy due to these events on quadruple witching days? If you closely watch the market, you may be able to determine which securities may sell-off and jump in to pick up bargains.

Hopefully, this article has confirmed and “busted” some of these myths. It is important to note that predicting price movements during quadruple witching can be difficult because of its unpredictable nature. Ultimately, whether you should enter a long or short position depends on your https://forexbroker-listing.com/ outlook for the markets and how you expect them to react when faced with high levels of options expirations. Traders who expect a sharp rise in volatility during quadruple witching may decide to buy options, anticipating that prices will rise due to increased extrinsic value.

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During Quad Witching, the expiration of these futures contracts amplifies the ebb and flow of market sentiment, potentially leading to heightened volatility as positions are settled. Investors can take advantage of quadruple witching by adjusting their trading strategy in advance of the expiration date. Since stock options, stock index options, and single-stock futures all expire on the same day, traders can anticipate increased volatility and make trades that capitalize on it. Quadruple witching day is the quarterly occurrence when stock index futures, stock index options, stock options and single stock futures all expire on the same Friday in March, June, September and December. Quadruple witching occurs on the third Friday of March, June, September and December.

Some would argue that options trading, in general, doesn’t typically affect the stock price, except for extraordinary situations like a gamma squeeze. On a quadruple witching day, holders of derivatives that expire on that date close or roll over their contracts. Rolling over a contract involves closing the existing contract canadian forex brokers and initiating a similar contract but with a later expiry date. During Quad Witching, traders may begin rolling, which involves closing out positions set to expire and opening new ones for a future date. Offsetting is another strategy where traders close positions by taking an opposite position to mitigate risk.

The buyer of a futures contract is obligated to buy the underlying asset at expiry while the seller is obligated to sell at expiry. Investors can choose to roll these contracts forward by selling them and purchasing contracts with expiration dates that are further out. They can also close out the trades by selling the contracts or letting them expire and get assigned the shares of the underlying stock. Single stock futures are legally binding contracts to buy or sell an underlying stock on a specific date, called the expiry date.

Sometimes one desk may be short Tesla and another long without knowing it. Suffice it to say, working out what will happen then on quadruple witching day is the stuff of quant and black box traders, and even most of those struggle with the complexity. Yes, quadruple witching can influence market volatility due to the simultaneous expiration of derivatives contracts.

The simultaneous expiration of different derivatives contracts injects enhanced liquidity into the market, allowing traders to execute large transactions more easily without greatly affecting the price. Investors are concerned about the price volatility of securities on quadruple witching day. Even though the volume of securities traded does increase about two-thirds of the time, there is price volatility only about one-third of the time.

The volume of contracts ending and the positions that have to be closed, rolled out or offset can lead to movements in the value of the underlying securities. On June 18, 2021, a quadruple witching day, a near-record volume of single-stock equity options was set to expire at the end of the day in the amount of $818 billion. As a result, a near-record of single stock open interest of about $3 trillion stood on June 18, 2021. Open interest refers to how many contracts are open during any given point during the day.

These options grant traders the right to buy or sell a stock index at a predetermined price, known as the strike price. With stock index options, traders can craft intricate strategies that capitalize on market movements without owning the underlying assets. As the first Quad Witching date of the year, March 17th sets the stage for a captivating interplay of market forces.

For example a stock trading near 50 dollars will likely have large open interest around the 50 dollar contract strike. Participants will be unsure of whether or not they will be assigned shares based on how the contracts expire. All of this leads to some interesting phenomena around quad witching and option expiring dates. Single Stock Futures (SSFs) provide a pathway for traders to speculate on the future price movements of specific companies.

Another factor is quarterly index rebalancing, also known as reconstitution, on the “witching” day. That means portfolio managers tracking rebalancing indexes, including those from S&P Dow Jones in the U.S. and FTSE in the U.K., may need to trade reflecting index changes. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.