The stock market ebbs and flows by nature, and it's not just traditional buying and selling of securities that cause volatility. So, too, do options and futures contracts within the market. That's where you'll find the origins of quadruple witching day.
Four times per year, the market experiences a mass expiration for contracts. These dates are referred to as quadruple witching, and they're grounds for major fluctuations.
What happens on quadruple witching day?
The third Friday of March, June, September, and December is called quadruple witching. This occurs when numerous contracts in the market (specifically stock-index futures, stock-index options, stock options, and single-stock futures) all expire on the same day.
This only happens about four times per year, so you can imagine investor sentiment places emphasis on the event. As a result, we tend to see massive volatility on and around these days, both in response to the contract expirations as well as in anticipation of it.
When was the last quad witching?
The last quadruple witching event occurred on Friday Dec. 18. The day prior, Thursday Dec. 17, the stock market was notably up in performance. The S&P 500 rose 0.6 percent, the Dow Jones Industrial Average (DJI) rose 0.5 percent, and the Nasdaq advanced 0.8 percent.
Fast forward to Friday and all the benchmarks closed in the red. This was likely jointly attributed to quadruple witching as well as serious stalls in stimulus package decision making from Congress at the time. DJI fell 0.4 percent, Nasdaq fell 0.1 percent, and the S&P 500 fell 0.4 percent.
By the end of the following week, all benchmarks were in the green.
This quad witching occurrence is different from the previous one. Now, third economic impact payments are already rolling out and investors could be ready to utilize their funds in the market. We could potentially see a more swift recovery, though there's always the possibility of a concurrent market correction as we've seen in recent weeks.
Triple witching is slightly different
In quadruple witching, four out of four markets expire simultaneously (stock-index futures, stock-index options, stock options, and single-stock futures, as aforementioned).
However, triple witching refers to when three out of four markets expire simultaneously (stock options, stock index futures, and stock index option). Triple witching excludes single-stock futures.
Because of this, quad witching is viewed as more influential, but triple witching is still something to look out for.
There's also double witching, which refers to two asset classes and occurs on the third Friday of every month except for March, June, September, and December.
Quad and triple witching hour
The last hour of trading on quad or triple witching day is referred to as the witching hour. This is when most contracts are set to expire, and it's also the time when trading volume and arbitrage is at its peak. While this does not inherently infer increased volatility, it does suggest it, so it's wise to keep this time top-of-mind as you do your afternoon trading.