Quadruple Witching

Loading the player...

DEFINITION of 'Quadruple Witching'

Quadruple witching refers to an expiration date that includes stock index futures, stock index options, stock options and single stock futures. While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September and December. Much of the action surrounding futures and options on quadruple witching days is focused on offsetting, closing or rolling out positions, as well as arbitrage trades, with the result being elevated volume, particularly in the last hour of trading.

BREAKING DOWN 'Quadruple Witching'

Quadruple witching replaced triple witching days when single stock futures started trading in November 2002. Despite the expiration of four contract types, the terms triple witching and quadruple witching are often used interchangeably. One of the primary reasons for the heavy volume on these expiration days is trades on underlying securities are automatically executed on options expiring in the money and expiring futures contracts. Under certain circumstances, positions are opened for the purpose of executing these trades, but derivative-based traders seeking to avoid principal-based transactions must take action to prevent open positions in their portfolios from expiring.

In-the-Money Options

Call options expire in the money when the price of the underlying security is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price. In both situations, the expiration of in-the-money options results in automatic transactions between the buyers and sellers of the contracts.

With call options, which are usually written on stock held in the writer’s portfolio, the shares are automatically called away at the strike price to be purchased by the buyer of the contract. The seller of a put contract that expires in the money is automatically assigned shares to buy at the strike price. In both types of contracts, traders can close positions prior to expiration to avoid automatic assignments and executions.

Closing and Rolling Out Futures Contracts

A futures contract contains an agreement between the buyer and the seller in which the underlying security is to be delivered to the buyer at the contract price at expiration. For example, Standard & Poor’s 500 E-mini contracts, which are 20% of the size of the regular contract, are valued by multiplying the price of the index by 50. On a contract priced at 2,100, the value is $105,000, which is delivered to the contract owner if the contract is left open at expiration. In this situation, contract owners can avoid delivery by either closing their contracts or rolling them out to a forward month.

Arbitrage Opportunities

Over the course of a quadruple witching day, transactions involving large blocks of contracts can create price movements that may provide arbitrageurs the opportunity to profit on temporary price distortions. Arbitrage can rapidly escalate volume, particularly when high volume round trips are repeated multiple times over the course of trading on quadruple witching days.

RELATED TERMS
  1. Triple Witching

    An event that occurs when the contracts for stock index futures, ...
  2. Witching Hour

    The last hour of stock trading between 3pm (when the bond market ...
  3. Double Witching

    Similar to triple witching, but instead of three classes of options ...
  4. Roll Forward

    To extend the expiration or maturity of an option or futures ...
  5. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
  6. Expiration Time

    A specified time, after which the options contract is no longer ...
Related Articles
  1. Markets

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Investing

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Investing

    Options on Futures

    Options on futures contracts offer another way for day traders to use options. These are traded on the same exchange as the underlying futures contract. Traders should take care to understand ...
  4. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  5. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  6. Trading

    Do Option Sellers Have a Trading Edge?

    Take a look at a study that discovered that three out of every four options expired worthless.
  7. ETFs & Mutual Funds

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
  8. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  9. Investing

    Stock Options and Weekly Options

    Stock option are one of the most straightforward option types. Day traders may be particularly interested in weekly options--options listed with only one week to expiry. Weekly options provide ...
  10. Trading

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
RELATED FAQS
  1. What happens when an option expires in money? Do I have to sell the option to make ...

  2. What does it mean to roll a derivative contract?

    Find out more about derivative securities, how to roll forward a derivative contract and what it means when a derivative ... Read Answer >>
  3. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  4. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
  5. How do futures contracts roll over?

    Learn about why futures contracts are often rolled over into forward month contracts prior to expiration, and understand ... Read Answer >>
  6. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
Hot Definitions
  1. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  2. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  3. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  5. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  6. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
Trading Center