What Is Quadruple Witching Day and Why Does It Matter

Quadruple witching day is the day when 1. index futures, 2. index options, 3. single stock futures, and 4. single stock options all expire at the same time. It falls on the third Friday of March, June, September, and December every year, and it usually brings heavy trading volume along with volatility.

Where the Name "Quadruple Witching Day" Comes From

Quadruple witching day is the day when 1) index futures, 2) index options, 3) single stock futures, and 4) single stock options expire simultaneously. Options are usually set to expire on the third Friday of every month. The "Friday" on which futures also expire on that same date is called "quadruple witching day."

But why is it called a "witching" day? In Western culture, a "witch" is an evil being who roams the sky at midnight and brings harm to people. On quadruple witching day, options and futures with heavy trading volume expire at the same time, causing significant price volatility. Because traders and investors often end up getting hurt as a result, the day came to be called a "witching day," a name with a negative meaning.

Did you know that besides quadruple witching day, there are also triple witching days and double witching days? The number here refers to how many types of futures and options expire on that date.

Quadruple Witching Day and Market Volatility

Quadruple witching day sees a substantial amount of trading volume. The reason for this heavy volume is that a large number of options and futures contracts are settled on the same day. Typically, after quadruple witching day, market indices such as the S&P 500 tend to fall, and trading volume in individual stocks also often decreases.

Contracts That Expire on Quadruple Witching Day

So what exactly are the options and futures contracts that expire on quadruple witching day? Options and futures are investment choices favored by professional investors or experienced individual investors. They involve somewhat complex concepts and risks, so caution is needed.

1. Understanding Options Contracts

An options contract is a derivative, meaning its value is derived from a financial asset such as a stock. An options contract gives the buyer the opportunity to exercise a right on a specific date at a predetermined strike price. However, the buyer is not obligated to actually do so.

An individual call option is a bet that a particular stock's price will rise. If the stock price is higher than the strike price on the option's expiration date, the investor can exercise the option or convert it into shares. A put option, on the other hand, is a bet that the price will fall. You make a profit if the price is lower than the strike price on the expiration date.

These options expire on the third Friday of every month. To buy or sell an option, you have to pay an upfront fee, or premium.

Index options are similar to stock options contracts, but instead of buying individual stocks, you trade an index such as the S&P 500. As with stock options contracts, your profit or loss is determined by the strike price at expiration. At expiration, they are settled in cash.

2. Understanding Futures Contracts

A futures contract is a promise to buy or sell an asset on a specific date in the future. A futures contract has a predetermined quantity and expiration date. When the expiration date arrives, the parties must fulfill the contract on the futures exchange.

Just like individual stock options, individual stock futures involve delivering the shares on the contract's expiration date. Each contract typically involves transferring and receiving 100 shares.

Index futures, meanwhile, involve fulfilling a contract on an index, rather than individual stocks, on a specific future date. On the expiration date, futures traders settle the value of the index futures in cash.

Wrapping Up

That covers quadruple witching day. Quadruple witching day is a special day when index futures and options, along with individual stock futures and options, expire simultaneously. It takes place on the third Friday of March, June, September, and December each year. On quadruple witching day, a very large amount of money often changes hands, and as a result it is frequently accompanied by significant market volatility, so caution is needed.