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Tomorrow Friday, March 19th will be a Quadruple Witching day.
Sounds spooky huh?
If you’ve never heard of a witching day before you might think it would have something to do with Halloween or maybe it could be a day where all the witches gather around their bubbling cauldrons.
Surprisingly, a Quadruple Witching day is actually an investment term that was coined as the name for the specific day that stock options, index options, stock futures, and index futures all expire simultaneously. This occurs only four times a year on the third Friday in the months of March, June, September, and December.
There are also Double Witching and Triple Witching days as well. These are much more common.
Double Witching days occur when stock options and stock futures expire on the same day. These take place on every third Friday of each month excluding months when a Quadruple Witching day takes place.
Triple Witching days occur when stock options, index options, and index futures all expire on the same day. These used to take place during the third Friday in the months of March, June, September, and December but were replaced by the Quadruple Witching day in November 2002 after single stock futures were made available to trade.
History of Witching Day
The term Witching Day sounds very ominous and in my personal opinion is very aptly named. In old folklore, the term Witching hour is commonly used to denote the time between midnight and 4 am. This period of the night has always been the natural setting for many supernatural events and is the only time witches, ghouls, and devils might traverse the world.
The Witching hour appears in many mythological instances and can be traced all the way back as early as the early 1500’s where the Catholic religion banned any activities during this time of the night as a countermeasure to growing fears about witchcraft.
In terms of the stock market, many spooky things can occur during Witching days due to the intrinsic volatility of all these derivatives expiring during the same market session. For those who believe in superstitions, it is said that chaos will follow any hapless individuals who stay out too late during Witching hour.
What happens on Witching Day?
Witching days are regularly occurrences in the market but they aren’t actually indicators of a huge market rally or correction. In fact, the only difference during these days is an increased volume in trades. For the average trader, these Witching days should be about as spooky as an elementary schooler’s halloween costume.
When options or futures expire, it normally means that there will be an increase in trading volume as many of these options or futures are exercised. Options and futures are both derivative products most commonly based on a single stock or index. These derivative products both provide the ability to purchase or sell a much larger volume of stocks or indexes.
The increase in trading volume on Witching days might lead to above average volatility in some cases but this is not a guarantee.
Regardless, many traders take advantage of the much higher trading volume on these days to profit off of various arbitrage strategies. As profitable options or other contracts are exercised upon, the sudden influx of trading volume may create temporary price fluctuations. If these opportunities can be identified quickly and accurately, there is a huge arbitrage opportunity.
Unfortunately, profiting off these opportunities is not as simple as it sounds. It is very difficult to be able to correctly identify these price movements and there are many established trading firms that are all developing and optimizing algorithms and strategies in order to take advantage of these opportunities.
As a retail investor, I don’t act any differently on Quadruple Witching days. Even if I did, I’m not sure it would make that much of a difference for my investments. Instead, I appreciate the history behind the naming and go about my day as I would normally.