What is Quadruple Witching in Derivatives Trading?

In the stock market, several events can significantly affect trading volumes and thus cause distinct price movements. These events can be major economic or political events like recession, rising interest rates, war, etc. Additionally, these can also occur due to natural or man-made disasters.   

However, there is another occurrence that takes place periodically which can affect market movements. It is called quadruple witching. Keep reading this blog in order to get a deeper insight into this concept!

What is Quadruple Witching?

Quadruple witching is a date on which four types of derivatives contracts expire at the same time. This event takes place in the U.S. stock market on the third Friday of every quarter-ending month. On that day, the last hour before trading closes for the day is called the quadruple witching hour, during which all contract expiries take place. 

Now, on this day, apart from letting their contracts expire, traders can do the following:

• Close their Current Position

Investors can consider closing their current positions by holding a position which is totally opposite to their current one. As a result, their current position gets closed. 

• Rollout 

In this case, individuals can close off their current position and hold another derivatives contract which has a future date of expiry. 

Contracts Related to Quadruple Witching

These are the derivatives contracts involved on quadruple witching day:

1. Single Stock Futures

As you may already know, futures contracts are derivatives agreements which provide you with the right and obligation to buy or sell an underlying asset at a pre-set expiry and strike price. Single-stock futures haven’t traded in the U.S. since 2020.

2. Options Contracts

Options are derivatives trading contracts that have an underlying security from which they derive value. When you purchase an options contract, you have to pay a premium to the seller. If an option holder, you get the right but not the obligation to purchase or sell the underlying asset at a specific strike price at the date of expiry. 

Now, options contracts can be divided into two types:

• Call Option

Call options are generally bought by investors when they anticipate a price appreciation on the underlying assets. On the expiration date, if the asset prices rise above the strike price, the option holder can exercise his/her right and reap profits. 

However, if the underlying asset’s market value remains below the strike upon expiry, they can let the contract expire worthlessly rather than incurring any losses. This is because there is no obligation to exercise the contract.  

• Put Option   

Alternatively, put options are purchased by investors when they anticipate price fall of the underlying securities. If on expiration, the underlying asset’s market value goes below the strike, you can sell them at the prefixed value. However, in case of the inverse, you can simply ignore to exercise the contract.  

3. Index Futures

Unlike stock futures, index futures contracts have stock market indices as their underlying assets. Upon expiry, the contract holder’s position is offset and settlements occur in cash. 

Unlike single stock futures, delivery of the underlying asset is not possible in this case. Index futures are generally used by traders to mitigate short-term losses on assets that are to be held for a long tenure.  

4. Index Options

Index options, as the name suggests, have stock market indices as their underlying asset. They help your portfolio gain exposure to this market segment without making any direct investments. The value of the underlying index on expiration determines the profit or loss of the trade.

Similar to index futures, there is no delivery of the underlying asset upon expiration. Furthermore, settlement of these contracts also occurs in cash.  

What Are the Market Conditions on the Quadruple Witching Day?

On the quadruple witching day, average trading volume generally remains high. This is a result of four different types of derivatives contracts expiring on the same date. As several investors try to close off their current positions or roll them over, it causes price alterations in the underlying securities. 

This causes disorder within the stock market but does not usually trigger adverse price movements. During such times, arbitrageurs take advantage of short-term price variations to secure gains. Moreover, due to the digitisation of all stock market activities, they can execute several orders within minutes, thus taking full advantage of the situation. 

Now, if many arbitrageurs liquidate their holdings at the same time as well as in the same direction, there is a high chance of price volatility. Apart from this, speculators can also make attempts to manipulate asset prices.  

In the week following the quadruple witching event, values of all major market indices, including the S&P 500, tend to plummet. Experts say this generally happens as this event usually exhausts the near-term demand for stocks in the market.    

Is there any Quadruple Witching Day in India?

In India, stock and index derivatives contracts having monthly tenures are settled on the last Thursday of their expiring months. So, technically, that date is the quadruple witching day in India.

Now, if that Thursday, by any chance, is a holiday, the expiry date shifts to the last Wednesday of that month.   

Final Word

Quadruple witching is an event in the US stock market that occurs on the third Friday of every quarter-ending month when four types of derivatives contracts expire at the same time. The contracts involved are single stock futures, options contracts, index futures, and index options. Traders can close their current position or rollout by holding another derivatives contract. On quadruple witching day, average trading volume is high, causing price alterations in the underlying securities. This may cause disorder within the stock market but usually does not trigger adverse price movements. However, in the week following the event, major market indices tend to plummet. In India, stock and index derivatives contracts are settled on the last Thursday of their expiring months, which technically makes that date the quadruple witching day in India.

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