Yahoo Finance What Is Quadruple Witching Day in the Stock Market?
Double, double toil and trouble: It's quadruple witching day for the financial markets!
What is quadruple witching, and what does it mean for do-it-yourself investors? We asked market experts to weigh in.
The phenomenon of quadruple witching happens just four times a year on the third Friday of March, June, September and December. On these days, four types of securities contracts expire, often leading to increased trading volumes and intra-day volatility on the key market exchanges.
[See: 11 Steps to Make a Million With Your 401(k).]
The four contracts that expire include:
Market index futures. Contracts in which an investor agrees to either purchase or sell a stock market index like the Dow Jones industrial average, the Nasdaq 100, the Russell 2000 index, or the Standard & Poor's 500 index on a future date, at a specified price.
Stock futures. Contracts that operate like index futures, but for individual stocks.
Market index options. A bit like a rain check, but for market index funds. These are contracts which grant investors the privilege -- but unlike futures, there's no obligation --to either buy or sell a stock market index at an agreed-upon price during a set timeframe.
Stock options. Contracts that operate like index options, but for individual stocks.
All four of these securities are fairly complex, and typically not recommended for average investors. Rather, they're often used by traders as a hedging mechanism.
Years ago, quadruple witching day was a tense one for the financial markets, because of a sudden increase in trading volume. As all these expiration dates coincide, investors -- including institutional investors like large pension plans and sovereign wealth funds -- suddenly buy and sell the contracts to replace expiring positions. Speculators look for quick arbitrage opportunities. And options that are expiring profitably, or "in the money" as traders will sometimes say, are automatically executed.
"This combination leads to higher than average trading volume, and can exacerbate underlying trends in market prices, either higher or lower," says Scott Clemons, chief investment strategist at Brown Brothers Harriman.
[See: 9 ETFs for Nervous Investors.]
As a result, quadruple witching days are some of the biggest days for trading volume. On quadruple witching days between 2009 and 2017 for example, trading volume of the S&P 500 averaged 134 percent above its 12-month daily averages, Clemons says.
All of that said, the market impact tends to be minimal for investors who hold tight. During that same time frame, the S&P 500 averaged just a 0.04 percent decline on quadruple witching days -- which is practically a "rounding error," Clemons says.
"In spite of higher trading volumes, quadruple witching days shouldn't influence the approach of longer-term investors, as the price implications -- if they exist at all -- are fleeting," he says. "More active traders, on the other hand, might try to take advantage of intra-day price volatility in specific securities that are being driven by options and future expirations."
Bill Glaser, executive vice president of portfolio management at Fisher Investments, agrees.
"As ominous as it sounds, quadruple witching is essentially meaningless for long term-investors," he says. "While it can lead to increased volume, it's a misperception it leads to increased volatility -- sometimes it can on an already volatile day, but other times it doesn't."
Overall, quadruple witching is just not as scary for market participants as it once was.
Eric Freedman, chief investment officer of U.S. Bank Wealth Management, points to the introduction of other financial products, which also provide a hedging function, and the availability of options that expire more frequently, as factors that have diminished the gravity of the day.
[See: 7 of the Best Stocks to Buy for 2018.]
"It's more a vestige of the past, than it is a significant, current market issue," he says.
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