Quadruple witching is a unique derivative expiration event where four different derivative types expire on the same day. This high number of derivative expirations can lead to substantial trading volume in the stock market as traders sell and buy shares to offset derivative positions and readjust portfolios. This is in response to losses and profits from expired derivative positions.
There are four expiring derivative classes. These include index futures, stock options, index options, and stock futures. Quadruple witching transpires on the 3rd Friday in every March, June, September, and December.
Quadruple Witching in Trading
The large trading volume on quadruple witching days happens due to the legal obligation to “meet the terms of derivative contracts.” Some of these terms are not cash-settled, or they have an option not to be settled by cash.
A sizeable relative volume of trades leads to more varied prices. Besides, the seemingly forced nature of trading in large blocks of underlying stock leaves many traders abandoning the usual way of ensuring that they enter or exit a position on the most favorable terms.
When these circumstances combine, it creates an ideal position for arbitrageurs because it forces the derivatives traders to ‘leave money on the table.’ In the highly competitive and efficient modern markets, this is a rare occasion.
Putting it all together:
Quadruple witching days are the most favorable events for day traders.
The high volatility creates a natural hunting ground for day traders with conditions where their specific trading strategies stand out. It also opens up the rare opportunity for arbitrage trades opening up a higher potential for profitable trades based on the day trader’s experience and skills.
Quadruple witching days represent the opportunity for most types of traders, but day traders are especially set up to make quadruple witching days far more profitable than other trading days.