What is Quadruple Witching and How It Can Impact Your Trading?

As CFD traders, we’re dealing most of the time with financial derivatives and as a result, we must take into account expiration dates. What’s important to note about these expiration dates is that four times a year (the third Friday of March, June, September, and December) something called Quadruple Witching. Why is it important and whether any special market behaviors are occurring around these dates will be our topic for today.

What is Quadruple Witching?

Quadruple Witching is a date on which stock index futures, stocks index options, stock options, and single stock futures expire simultaneously. We all know that stock options contracts and index options expire on the third Friday each month, but only four times a year all four asset classes expire simultaneously, leading to increased trading volumes.

Tomorrow, June 19th will be when the second quadruple witching for 2020 will occur, and it comes at a time when markets had rebounded impulsively from the low, during the second quarter. Does that mean we should expect the stock markets to perform in a particular way in the near term?

Expectancies from the stock markets

As seen in our last article, stock markets had started to move south on rising COVID-19 cases, but for the first few days of the week, valuations had managed to recover some of the losses. This quadruple witching could be important because it occurs at a time when the markets have rebounded sharply and risks are starting to rise again.

From a historical point of view, indices like the S&P500 tend to decline in the week following the quadruple witching. Although that does not guarantee it will happen again this time, we’ve already seen the market can go down impulsively. A reassessment of risk could influence fund flows in the near term and trigger a new repricing process, now that central are reducing their monetary interventions due to the reopening of economies.

Traders must also know that just because a confluence of expirations occurs, it does not mean volatility will spike at the same time. Temporary price distortions and increased trading activity do occur, but there is little evidence quadruple witching leads to increased profitability. We’ve already talked about when and why could stock markets resume selling, but quadruple witching is not necessary a strong enough reason to generate a long-term market move. Did you know what quadruple witching is and if yes, what can you share from your experience? Leave a comment below!

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