Quadruple witching definition, dates and impact

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• Stock Index Futures are contracts where traders agree to buy or sell the value of a market index, like Nifty or Sensex, at a future date.
• Quad witching refers to a date that occurs four times each calendar year.
• On quadruple witching days, stock index futures, stock index options, stock options, and single stock futures expire simultaneously.
• This means that the quad witching takes place on the third Friday in the months of March, June, September, and December.
• Due to the high trading activity, price movements and swings become more pronounced.

Price Movements and Swings

While increase in liquidity is preferable, sudden increase in implied volatility just before settlement can cause major pain, especially to the short option positions. Instead, they can close their contracts by registering an offsetting trade at the prevailing price. In this manner, they can settle the gain or loss from the buy and sell prices. They do this by offsetting the existing position and simultaneously booking a new option or futures contract to be settled in the future. 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.

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By default, the futures contract is an agreement between two parties upon which the underlying security is delivered to the buyer at a predetermined price and date. Now that you know what quadruple witching is and where its name originates, you can conclude its effect on the market. Years of market history had shown that quadruple witching days could lead to a substantial increase in volatility and (rarely) market havoc. While this isn’t always the case, it is essential to be aware that the markets might be unstable around these particular dates. It’s difficult to pinpoint an actual trend or market sentiment from a quad witching day. Some will point to it being a bearish catalyst as we can sometimes see some market downturn during the last hour of the quad witching session.

Quadruple witching is one such well-known market phenomenon with a catchy name. According to Dow Jones Market Data, the average daily gain of the S&P 500 index is 0.04% since the first quadruple witching in 2002. The phenomenon of Quad Witching has a pronounced impact on various market segments, particularly the major indices like the S&P 500 and individual heavyweight stocks. Investor sentiment, usually shown in the Fear & Greed Index, can significantly fluctuate during Quad Witching as market participants react to the amplified trading volume and volatility. Fear or euphoria can be exacerbated, leading to reactive trading behavior. Institutional and retail investors must navigate the choppy waters with prudence to avoid undue losses or take advantage of potential opportunities.

Resultantly, there what is the best brokerage to use is a lot of chaos in the stock market affecting the value of underlying stocks. The good thing is that the futures and options markets are highly liquid. It’s particularly liquid on quadruple witching days, meaning you won’t end up being locked in a trade.

Quadruple witching

• For many investors, especially beginner ones, learning how the market dynamics work is a complicated process that may be hard to grasp.
• The NASDAQ Composite, dominated by tech companies, experienced substantial volatility, with a notable surge in trading volumes.
• This is according to the law, which was established by legislation passed in 1970.
• This is especially true in the last hour of trading on quad witching day, which is usually referred to as the quad witching hour.
• Conversely, a put option allows an investor to profit from a drop in the price of a stock as long as the price is lower than the strike on expiry.
• Through these strategies, market participants can navigate Quadruple Witching with calculated precision, optimizing their positions while managing potential risks.

Large positions are often unwound around opening or closing on quadruple witching days, and traders should be on the lookout for block trades that cause significant price movements. Throughout the length of a quadruple witching day, there are transactions involving huge blocks of contracts. This spike in volume can cause price swings, giving arbitrageurs the opportunity to profit from momentary price distortions. Especially when high-volume round trips are repeated numerous times during trade on quadruple witching days.

Triple witching vs. quadruple witching: Similarities and differences

According to a Reuters report, trading volume on U.S. market exchanges on that day was “10.8 billion shares, compared to the 7.5 billion average… over the last 20 trading days.” While quadruple witching takes place four times a year, stock options contracts expire more frequently—on the third Friday of every month. Single stock futures are obligations to take delivery of shares of the underlying stock at the contract’s expiration date at a specified price. Even when single-stock futures traded in the U.S. they were Day trading mutual funds a minor market segment relative to the trading flows in stock options and index options and futures.

However, novice investors must not actively participate on this day but observe the situation. Quadruple witching events are when arbitrage traders thrive; it’s their bread and butter. Arbitrage is a risk-free trading strategy that allows traders to exploit market efficiencies when it comes to the pricing of various securities.

Stock options provide traders with the right to buy or sell specific individual stocks at predetermined prices. This dynamic interplay of stock options introduces a nuanced layer of trading strategies for investors to tailor their positions to the unique attributes of individual companies. As stock options reach their expiration, traders must make decisions that reflect their assessments of both broader market trends and the specific prospects of the companies involved. Stock index futures serve as a window into the broader market sentiment. These contracts allow traders to speculate on the future performance of a specific stock market index, such as the S&P 500 or the Nasdaq Composite.