Quadruple Witching Dates: A Complete Traders Beginners Guide

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Traders and brokers will do almost anything to get profits from the market. Therefore, over and above the many strategies, do magical spells work? To cover the topic comprehensively, we’ll consider a common phenomenon: Quadruple witching.

The complex nature of financial markets can cast out any prediction masters. And therefore, the question remains – if magic can work?

And to help us share a reasonable reply, we’ll seek an expert’s view regarding the quadruple witching days. Ezekiel Chew from Asia Forex Mentor will help us through. He comes with an experience of two decades of trading. And he shares high-value analysis of markets and also trains in trading.

What are Quadruple Witching Dates?

Quad stands for a context comprising four elements. Therefore, with respect to dates, we mean four days within a year. It’s out of the four unique dates that the full term – Quadruple witching days or dates arise.

In reality, there’s no witchcraft at all from the four unique dates. And to be specific, the dates fall on the third Friday of every quarter in a year. The third months here are March, June, September, and December of every calendar year.

What actually happens behind the scenes on each of the unique dates is the expiry and closure of derivative products. And the cumulative effect is a scene of unusually high volumes of trading across the markets.

Since traders have seen the spike in volumes of trading occurs for many years – it’s a unique sequence of events. It’s repetitive and yet occurs on the four Fridays annually. Therefore, to pick the dates, pick on the third Friday of the last month in a quarter.

Borrowed from Folklore Regarding Quadruple Witching Hour

The unique trading scenario with a quadruple witch date comes with high volumes of trading. Of this happening for many years, traders would notice. The volumes spike very high, especially as the trading day comes to a close for four trading zones: Sydney, Tokyo, London, and New York.

Witching in the context, therefore, comes into the scenario traders seemingly believed it to be the works of spells. So the last hour of trading on any specific witch date was picked across history from past performance over the many trading years.

However, the background of high volatility and trading volumes arises from the expiry of options and futures in the markets by default. And we can agree that the so-called witching hour is borrowed from folklore out of ignorance, but after carefully observing market volatility and behavior for many years.

High Trading Volume

As regards trading volumes, the quadruple witching days have records showing trading volume rising 50% higher than regular trading days. Of course, it comes with high volatility, and traders can well take advantage of it.

Behind the scenes, when a quarter comes to an end or expires, traders with options have to close them. Traders holding derivative product options have to take action. They can close the futures or options. Also, they can repurchase them.

By virtue of the requirement to close or repurchase the options, more trading activity is seen in the markets than usual. Therefore, the high trading volume arises from the – must act by deadline scenarios.

High trading volume is what traders translate as high interest in a particular asset or a currency pair. On charts, markets break away from consolidation channels. Traders benefit from the breakaways by position appropriately.

One other beneficial aspect of high volumes of trading is the liquidity in the markets. On the quadruple witching days or dates, high chances of a stock future or option finding liquidity are higher. Consequently, the expiry of the contracts could present a chance to find a match and exit the markets.

What is Trade Quadruple Witching?

Trading quadruple witching seeks to position oneself to take advantage of the high trading volumes. Brokers see it as a normal working day. However, traders perceive the unusually high volumes of trade as a magical spell.

The four said dates per year coincide with the default expiry of derivative contracts. Since it happens simultaneously, the high trade activity adds to the ordinary trade activity volumes for the day. Hence, the unusually high trading volumes.

In specific details, four sets of contracts expire on the specific four days per year. They include:

• Stock index futures
• Stock index options
• Stock options
• Single stock futures

If a trader wants to trade quadruple witching opportunities, they have to target the four opportunities every year. Those are the third Fridays of the following months: March and June for the first half-year. The second half dates fall between September and December.

Increased Volatility on the Third Friday

In reality, the third Fridays to the last month of a quarter witness high volumes of trades. The volatility is equally high; hence this is a situational opportunity for traders who seeks to profit from highly volatile markets.

One thing to be clear with the third Friday is the unusually high volumes. Out of the volumes, there comes high volatility. The reason is that traders cannot tell with certainty the direction a market will take.

Therefore, with the high volatility, traders require to reassess their risk sizing and stick to correct trading strategies. It’s not an opportunity to trade risk freely.

And the situation with volatility can only get worse. There’s no set certainty whether markets will trend upwards or downwards or consolidate. However, most strategies and indicators seem beneficial with trending markets.

Of particular interest is the last trading hour of each of the four quadruple witching days. Since derivative traders have an obligation to close out contracts, the volatility usually spikes up wildly. By market closure of the New York sessions, hedgers must have made decisions: closing out, rolling over, or partial closes.

Stock Index Options and Other Derivatives

Financial contracts between parties have set rules and obligations. And the parties draw them for specific reasons. One is to profit from the direction of prices with stock index futures. And the second is to minimize the exposure to risks with price movements.

Stock Index Options and Other Derivatives are financial contracts with set rules and obligations for the parties taking part.

Here are key details regarding derivatives. Each of these expires in line with the annual Quadruple Witching dates:

Stock options – these are options contracts. They are based on a specific stock. Any stock options contract allows the buyers the right either buying or selling the underlying assets for a specific price.

We can classify stock options into two. One is the put options, best known as sell options. Sell options bet on the speculation that prices will fall.

Secondly are the call options. Call options are the opposite of put options. In other words, we can say they are the buy options. And they work with speculation that prices will rise.

Stock index futures or equity index futures are a category of futures contracts comprising a market index. Market indices track the performance of a portfolio of stocks.

And in most cases, the portfolio is a buildup of stocks within a thematic area like tech stocks. One good example of a stock index future is the DJIA or Dow Jones Industrial Average or NASDAQ.

Agreements under stock index futures require the buying or selling of the underlying asset at specific prices and on specific dates.

• Single stock futures or SSF is a futures contract comprising a single stock as the underlying security.

Usually, the contracts are drawn in batches. Each single stock future holds 100 shares.

• Stock index options: these are financial derivatives with the following conditions -holders have rights less the obligation to buy or sell the underlying index. A good example of stock options is the S$P 500 index.

The Index options settlement is usually cash. Also, index options have no early settlement arrangements. Meaning that settlement must be on maturity dates.

 Activity around Stock Index Futures

Stock index futures contracts bind two parties regarding the underlying asset. The conditions apply for settlement at agreed values and specific future dates. Derivatives are zero-sum games.

In better words, if party one is long the futures contract and part two is short, the settlement at expiry means the loser pays the winner. The winner gets the difference in prices at expiry. And the applicable price is as of the expiry date. However, in reality, many futures contracts close far ahead before expiry dates.

Fair Value of an Index Future

An index future under the contract duration only takes a fair value of the component stocks. It, however, comprises the index value upon expiry.

The relative value is also known as the basis. The basis reflects two components: one is the expected dividends foregone, and the second is the differences in costs of financing an index future plus the costs of individual stocks in comprises.

Index Futures Arbitrage

Index futures do not trade at fair value prices. The reason is that parties taking on index futures have varying reasons for taking on the contracts. The first is for hedging purposes, and the second is for purely speculative purposes.

It happens that index futures are more liquid than the individual components. It’s the reason many traders jump into contracts to take advantage of the disparities in prices. It’s an opportunity better known as the index arbitrage.

Traders look to take small profit margins. And it’s simply when the index future’s premium or discounts are able to cover transacting costs. Advanced computer monitors analyze the fair values every other minute. And they join in either going short or long as applicable.

Make Calls on Stock Market Options

Options are derivative securities. The derivative nature arises because the pricing of an option derives from something else. As earlier mentioned, options contracts give the holders the rights but not the obligations to exercise.

Other than exercising at given dates and prices, options contracts are in two forms. And each aligns with the direction of market expectations. First, call options or best the buy options. Second, are the put options or, better, the sell options.

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Conclusion: Quadruple Witching Dates

Reading through the post, you’ll notice that quadruple witching days are a phenomenon that reports repeated volumes of trading on a specific day per quarter in a calendar year. The specific days fall on the third Fridays of the third month of a quarter.

Realistically, there are no witching or magical spells. However, the observation has been documented for many years without observers being able to accurately unravel what happens below the surface of the water.

Straight to the point, the derivative products have simultaneous expiration, which coincides with the quadruple witching days – hence the high volumes of trades witnessed. Records show the effect can trigger a significant volume of trades up to 50 % above ordinary days.

Having seen what actually happens behind the scenes, it’s for traders to capture the opportunities with the high volumes. Of course, the volatility arises with a challenging task for traders – which directions will the prices hit? Therefore, it’s not an opportunity to approach trading without usual caution or investment advice for risk management.

Quadruple Witching Days FAQs

What happens on quadruple witching day?

On a quadruple witching day, traders witness an unusually high volume of trading. Though termed as witching, it’s just an ancient abstraction of what really takes place in the markets.

Coincidentally, derivative products expire concurrently, and market makers have to take action. And that’s what inherently adds to the high volumes of trading – especially during the last hour of trading on a witching day.