Indian market on quadruple witching days: What does this mean for a trader’s game plan

For many investors, particularly those who are new to this, understanding the depths of the market may be challenging. Since more individuals have started becoming involved in trading, events related to financial markets are creating a stir. Quadruple witching is one such well-known market phenomenon with a catchy name. 

So, what is quadruple witching, how does it function, and how does it compare to triple witching – we will dive deep into this “witchcraft” in this article. Let’s begin. 

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What is quadruple witching?

Quadruple witching in the stock market contract expiration for four derivatives instruments, including index options, index futures, stock futures, and stock options. Its knowledge is vital because the expiration of derivatives contracts means the settlement and exercise of the contract.

Increased trading activity typically occurs around expiration as investors and traders attempt to close their current positions or roll over into the next month. The name quadruple witching comes from Western folklore regarding the “witching hour” – the hour at which evil is most potent. 

Similarly, volatility might get at its highest during four simultaneous expiration of derivatives contracts. Other common names for quadruple witching are quad witching, quadruple witching hour, or quadruple witching day. 

Talking about the quadruple witching history, the third Friday of each month—March, June, September, and December—is designated as the freaky Fridays in stock trading. According to this context, March 17, June 16, and September 15 were the dates for quadruple witching in 2023; the upcoming one is December 15. 

How does quadruple witching work?

The expiration date is different for every exchange worldwide. Certain exchanges have set up their contract expiry to conclude on a certain day of the week or month, whereas others would rather settle and have the contract expire on the last day of the calendar month. 

For instance, the National Stock Exchange in India uses Thursdays for weekly expiries and the last Thursday of the month for monthly expiries. In contrast, US exchanges designate Friday, the third Friday of months: March, June, September, and December, contracts totalling hundreds of billions of dollars expire at once.

This occurrence is no longer a mystery. Market makers that have closed out matched hedging positions by selling expiring stock and index options contracts increase trading volume. Meanwhile, contract rolling before expiration enhances turnover in the F&O markets.

Triple witching, a concept closely connected to quadruple witching, is another critical point to consider here. Triple witching has become common since single stock futures are no longer traded in the United States. 

Also read: Understanding after-hours trading and strategies for success

Why is quadruple witching important?

In quadruple witching, trade volumes tend to rise significantly for various reasons. Traders place multiple orders on the market when contracts end, and new ones are formed. 

Upon closing their positions in the existing contracts, some choose to roll over or enter a comparable contract, while others prefer to enter settlements. In addition, investors hedge their bets and attempt to profit from volatility and changes in the market. 

If you trade futures or options, quadruple witching is essential since deciding how to handle your open positions and contracts is critical. You risk making the incorrect choice, or at the least, the worst one, if you put off making that crucial decision until the final day. 

So, to be prepared for the triple witching day, you must constantly plan and have a solid risk management strategy. Although you may modify your plan as needed, knowing where you want to go is crucial.

It is also imperative that other market participants engage in quadruple witching. It may cause volatility to rise and skew market data for specific instruments. When the quadruple witching day arrives, for instance, a trader may find it difficult to discern whether price fluctuations in a given stock are due to the expiration of numerous derivative contracts on the same day or to the stock’s basic concepts, recent statements, and related news.  

A spike in trading volume during a specific period is the most notable impact of quadruple witching on the market. Certain lucrative contracts that are currently in place for futures and options may be offset at the going rate of exchange. In this manner, they can make up any difference between the buy and selling prices, gain or loss. 

Trading activity often increases as a result of all these market movements. For example, here you can see an example of quad witching in NSE that took place in 2020-2021.

In summary, traders and their market behaviour forecasts greatly benefit from quadruple witching. The well-known truth is that the market often calms down and decreases following the quadruple witching week due to the depleted near-term stock demand.

Also read: How to trade in options and maximise your profit?

Triple witching vs. quadruple witching: Similarities and differences

When stock index futures, and stock options, and stock index options,  all expire on the exact same day, it’s known as triple witching. Due to the addition of single stock options in 2002 and their quarterly expiration dates, triple witching is occasionally referred to as quadruple witching.

Below is a brief summary of the distinctions and parallels between triple witching and quadruple witching.

Conclusion 

If anything, quadruple witching is an event that reminds traders/investors not to be greedy. Delaying that decision until the actual day is likely to go wrong. Thus, it’s essential to always plan ahead and have a suitable risk management strategy in place to know what to do when the witching day arrives.