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Quadruple witching occurs four times per year when stock index futures, stock index options, stock options, and single stock futures expire simultaneously. This occurs on the third Friday of March, June, September, and December. Let’s dive into quadruple witching in more detail and see how it has impacted markets in the past.

What Is Quadruple Witching? 

Upon hearing the term “witching,” folklore buffs may immediately jump to the term “witching hour.” Dark nights, bright moons, and images of ghosts, witches, demons, and supernatural events may arise, giving one pause.

Traditionally, this “hour” usually occurs somewhere between midnight and 4 a.m., with the 3 a.m.to 4 a.m. time being the most common. Chances are, however, you aren’t reading this article because you were interested in the occult. You want to know how it relates to investing. Before I get to that, though, let me point out some similarities.

There is an hour when a lot more volume (and potential volatility) are in the markets, and that’s specifically the last hour of the trading day at expiration. Rather than in the early morning however, this is between 3 p.m. and 4 p.m. (Eastern). Coincidence? I’ll leave that for you to decide.

Definition 

As mentioned above, this “hour” refers to the last hour of trading at expiration – but expiration of what? In this context, we’re talking about stock index futures, stock index options, single stock options, and single stock futures. These contracts are available on indexes such as the S&P 500, NASDAQ 100, Russell 2000, as well as commodities and currencies. In addition to the futures contracts, these instruments also offer options contracts.

Individual stocks also offer options, and since 2002 (at least in the United States), there are some stocks that also have futures contracts. However, in the United States, the one exchange that allowed single stock futures, OneChicago, closed operations in 2020. Single stock futures are still traded in other markets, though, and it is likely that they will return to the United States.

Futures contracts expire quarterly, while options contracts expire monthly. Whichever month it is, it happens on the third Friday of the [expiration] month. So while options expire every month, futures only expire in March, June, September, and December. It is when all four contracts expire on the same day that you have Quadruple Witching.

Therefore, you would have Quadruple Witching the third Friday of March, June, September, and December of every year. You would see the “quadruple witching hour” the very last hour of trading on those days.

Effects on the Market

There are many reasons institutions or individuals decide to get into, or out of, a particular trade. Some trades are very short-term, while others may be medium- to long-term. Not all positions will be profitable by expiration, nor will everyone want to exit their positions at expiration. As a result, there is a lot of activity on those days as traders try to close, roll-out, and/or offset their positions.

Other traders, knowing the increase in supply and demand, may try to take advantage of price imbalances during these times. This practice is known as arbitrage, and while it can be profitable, it also can be quite risky.

Over the past 15 years, there is a statistically significant increase in volume specifically on the day of Quadruple Witching, but also the week of the event as compared to the previous 50 trading days. However, not all Quadruple Witching days/weeks experience an increase in volume, with some even experiencing a dramatic decline as compared to the previous 50 trading days.

This is because, like it or not, the markets are affected by more than just when contracts expire. There could be economic news or other world events that cause a reaction in the markets. Some of these may be positive, while others may be negative. In many such cases, traders have already done what was needed prior to expiration, so those days are rather light in comparison.

Conversely, when other factors coincide with Quadruple Witching, it can lead to some dramatic activity. It is interesting and important to note, while there is an increase in volume, the volatility is more or less within expected behavior. That is, the overall market’s volatility.

With the increase in various hedging instruments (such as single stock futures), and having multiple expiration dates throughout the year, the effect on the overall market, specific to Quadruple Witching, has decreased. Individual stocks may experience higher degrees of volatility, but the market as a whole tends to be slightly bullish on the week, if anything. The increase in volatility of the markets is typically seen the week after Quadruple Witching.

Volume on Quadruple Witching has been greater than average roughly two-thirds of the time, going back to 2005. Volatility, however, specifically the range between the highs and lows, has only been greater than average about one-third of the time over the same period.

Since in nearly every case of increased volatility, you saw an increase in volume, one could say that if there’s an increase in volume, you are just as likely as not to see an increase in volatility.

Quadruple Witching Examples 

In September of 2008, in the midst of the housing collapse, volume on Quadruple Witching was over 1.5 times greater than average – but had more than 4 times greater volatility. During the crash at the end of 2018, there was roughly double the volume and volatility in December of that year. In March of 2020, at the start of the worldwide pandemic, there was an increase in volume and volatility between 2.25 and 2.5 times the average.

While that may be no surprise to anyone, it is interesting to note that there was roughly 1.5 times the volatility and nearly 3 times the volume the preceding Quadruple Witching day, December 2019.

Barring those incidents, however, the majority of the time, while volume may have been higher than normal, the volatility of the overall market was at or even less than normal levels.

Conclusion 

Contrary to any first impressions upon hearing the term Quadruple Witching, there is nothing supernatural about those days in the market. The contracts for futures and options on indices and single stocks happen to expire on the same day, once a quarter. Because there are four types of contracts expiring, you get the term “Quadruple."

While it may have once been true that the markets moved “wildly” due to the confluence of those instruments expiring on the same day, much of those swings have simply dissipated for one reason or another. The increased volume on those days, and especially the final hour, may still be present, but most traders need not fear the “Witch."