Four times every year, the stock markets experience a quadruple witching day. While this might sound like something out of a Halloween movie, it has to do with expiring options contracts. The day can be scary to options traders. Generally, we experience a rise in volatility during a quad-witching week. If you are an options trader, you know that volatility can be your best friend and worst enemy. So what exactly is quadruple witching? Keep reading, because we have the answer!
Quadruple Witching or quad-witching is when four sets of derivatives contracts expire simultaneously on the same day. On four Fridays each year, stock options, index futures, index futures options, and single stock futures all expire. To be completely accurate, it isn’t quad-witching anymore since single-stock futures haven’t been traded in the US since 2020.
These quadruple witching days occur each quarter on the third Friday of the third month. This week, June 16th marks the quad-witching day for the second quarter of 2023.
What is Quadruple Witching for Stocks?
On every quadruple-witching day, we can potentially experience a rise in volatility and a sharp rise in trading volume during the session. This is especially true during the last couple of hours of the session as institutional investors reorganize their portfolios for the following quarter. This reorganization usually consists of buying or selling options contracts for the next quarter. These trades often lead to rolling contracts forward, which is a way of closing a current contract and buying or selling a new one with a new strike price and expiration date.
Contrary to popular belief, quad-witching days have little impact on the prices in the markets. These events strictly revolve around futures and options contracts. While they are connected, this reshuffling of contracts has a minimal direct impact on the prices of the underlying assets.
When is the Next Quadruple Witching Day in 2023?
As mentioned, the next quadruple witching day for stocks is on Friday, June 16th. This is the second quad-witching day in 2023, with the first one taking place on March 17th. The final two quadruple witching days in 2023 will take place on September 15th and December 15th.
|Quarter||Quadruple Witching Date 2023|
|Q1 2023||March 17th, 2023|
|Q2 2023||June 16th, 2023|
|Q3 2023||September 15th, 2023|
|Q4 2023||December 15th, 2023|
Is Quadruple Witching Day Bullish or Bearish?
There isn’t a specific trend that shows that quadruple witching days are bullish or bearish for the markets. With a rise in trading volume and a potential rise in volatility, the sentiment usually mimics the current sentiment of the markets. If it is a bearish outlook for the next quarter, the quad-witching day will likely be bearish and likewise for bullish outlooks.
Should you avoid trading on quad-witching days? Experienced traders enjoy the high trading volume that quad-witching days bring. They also seek out arbitrage opportunities and look to capture higher premiums on options contracts. As always, use your own discretion and risk tolerance to determine if making a trade is right for you!
What Expires on Quad-Witching Day?
Historically, four different derivatives contracts all expire on quad-witching days. Since 2020, the US markets no longer trade single stock futures so the term quad-witching is factually incorrect. Each day is now just a triple-witching day but that doesn’t sound as ominous!
The three types of contracts that expire on quad-witching days in 2023 are:
- Stock Options
- Index Options
- Index Futures
Here is a brief introduction to each type of contract and how they have an impact on quad-witching days.
What are Stock Options?
Stock options are derivatives contracts that allow investors to place a bet on the price direction of a single stock. These give the buyer the right, but not the obligation, to buy the underlying stock for a predetermined price called the strike price. A seller of options is able to collect a premium from the buyer as income.
There are two types of options contracts: calls and puts. Call options speculate on a price increase for the stock or index while a put is a bet on the price of the asset decreasing. You can buy or sell either type of options contract which opens up a lot of the strategies that make up the options market.
Stock options usually expire weekly on a Friday although some expire on a monthly basis.
What is an Index Option?
An index option is nearly identical to a stock option except that it tracks the price of the underlying index like the S&P 500 (SPX). You can buy or sell puts or calls against the index. Unlike stock options, index options often have daily expiration dates as well. This has caused a major surge in the popularity of 0DTE options or zero days to expiry options, which are more like a gamble in today’s market.
Another difference between a stock option and an index option is that index options are European-style options contracts. This means there is no ability to exercise these early so they must be held until the date of expiration. Index options are also cash settled which means you are not assigned shares of the index at expiration.
What are Index Futures?
Index futures are slightly different from options contracts because they are a legal agreement to buy or sell the index at a future date for a specified price. These contracts have fixed quantities of shares and expiration dates, and are also cash-settled like index options. Most index futures are used by institutional investors to hedge their portfolios against a sudden market collapse or surge.
What is Rolling an Option?
Rolling options contracts is a necessary skill required by any options trade because it can mitigate losses and potentially save a losing trade. When you roll an option you are closing your current option contract and re-opening a new one at a future expiration date with a new or even the same strike price.
Here is an example of rolling an option that is about to get assigned:
For this example let’s say you have sold a put contract against Tesla (TSLA) for the $200 strike price.
Tesla stock is currently trading at $202 and you are concerned that the price will fall below $200 and you will be assigned 100 shares of Tesla stock.
If you want to avoid being assigned then you would buy to close your current $200 put contract for Tesla.
What do you do now? Now you can look further down the road and sell the same put contract on Tesla for a lower strike price.
For this example, let’s sell a put for Tesla next week with a $195 strike price. In most cases, you will capture enough premium from the second trade to cancel out the losses of the first trade. There are times when the stock has fallen a lot and even rolling the contract out will result in a loss.
At this point, you will need to determine if you want to keep rolling the contract at a slight loss or be assigned those shares. Every trade is different so use your own discretion when rolling options contracts!
The Bottom Line: What is Quadruple Witching Day for Stocks?
At the end of the day, the quadruple-witching day for stocks is a lot of hype for a minimal impact on the markets. Quadruple witching days take place four times each year on the third Friday of the last month of each quarter. On this day, stock options, index options, and index futures all simultaneously expire. This causes a spike in trading volume which has the potential to cause some volatility.
Overall, the quadruple witching day has no impact on long-term investors and really only affects day traders or options traders. If you are an options trader, make sure you know how to roll your options contracts if your positions are ever at risk of being assigned!