Quadruple Hex occurs four times a year when stock index futures, stock index options, stock options, and individual stock futures expire at the same time.
This happens on the third Friday in March, June, September and December.
Let’s dig deeper into quadruple witching and see how it has affected markets in the past.
When folklore fans hear the term “witches”, they can jump straight to the term “witches hour”.
Dark nights, bright moons and images of ghosts, witches, demons and supernatural events can appear and give a break.
Traditionally, this “hour” usually occurs between midnight and 4 a.m., with 3 to 4 a.m. being the most common.
However, there is a chance that you are not reading this article because you were interested in the occult. You want to know how it relates to investing.
Before I get to that though, I want to point out some similarities …
There is an hour when a lot more volume (and potential volatility) are on the markets, and that is specifically the last hour of the trading day after it has expired.
Instead of the “AM”, however, this is between 3 and 4 pm (east). Coincidence? I leave that to you.
As mentioned above, this “hour” refers to the last trading hour after it has expired – but after what?
In this context we are talking about Stock index futures, Stock index options, individual stock options and single stock futures.
Those familiar with trading e-minis trade futures contracts, albeit smaller ones than full-size futures contracts.
These contracts are available for indices such as the S&P 500, NASDAQ 100, Russell 2000, as well as commodities and currencies. In addition to futures contracts, these instruments also offer options contracts.
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Individual stocks also offer options, and since 2002 (at least in the US) there have been some stocks that also have futures contracts.
In the US, OneChicago, the only exchange that enabled single-stock futures, closed operations in 2020.
However, single stock futures continue to trade in other markets, and it is likely that they will return to the US.
Futures contracts expire quarterly, while options contracts expire monthly.
Whichever month it is, it happens on the third Friday of the [expiration] Month.
While options expire every month, futures only expire in March, June, September and December.
If all four contracts expire on the same day, you have Quadruple Witching.
Therefore, on the third Friday in March, June, September and December of each year, you would have the Quadruple Witchcraft.
You would have “four times the witch’s hour” in the very last trading hour on these days.
There are many reasons why institutions or individuals choose to get in or out of a particular trade.
Some trades are very short term while others can be medium to long term. Not all positions will be profitable when they expire, and not everyone wants to leave their positions when they expire.
As a result, there is a lot of activity these days as traders try to close, roll out and / or move their positions.
Other traders, familiar with the surge in supply and demand, try to take advantage of price imbalances during these times.
This practice is known as arbitrageand while it can be profitable, it can also be quite risky.
Over the past 15 years there has been a statistically significant increase in volume especially on the day of the Quadruple Witch, but also in the week of the event compared to the previous 50 trading days.
However, not all Quadruple Witching days / weeks show volume growth, with some even showing a dramatic decrease compared to the previous 50 trading days.
This is because, like it or not, the markets are affected by more than timing Contracts expire.
There could be business news or other world events causing a reaction in the markets.
Some of these can be positive while others are negative.
In many such cases, dealers have already done what was needed before the expiry, so these days are rather easy in comparison.
Conversely, when other factors coincide with Quadruple Witchcraft, it can lead to dramatic activity.
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It is interesting and important to note that as the volume increases, the volatility is more or less within the expected behavior.
That is, the volatility of the overall market.
With the increase in various hedging instruments (such as futures on individual stocks) and multiple expiration dates over the course of the year, the overall market impact specific to quadruple witching has diminished.
Individual stocks may be more volatile, but the market as a whole has been slightly bullish for the week, if at all.
The increase in market volatility can usually be seen during the week after this Quadruple witchcraft.
The volume of Quadruple Witching was above average in around two thirds of the cases and dates back to 2005.
The volatility, especially the area between highs and lows, was only about a third of the time above average in the same period.
Since in almost all cases of increased volatility there was an increase in volume, it can be said that if the volume increases, an increase in volatility is as likely as not.
In September 2008, in the middle of the house collapse, the volume of Quadruple Witching was over 1.5 times the average – but had more than 4 times the volatility.
During the crash in late 2018, the volume was roughly twice that and Volatility in December this year.
In March 2020, at the start of the global pandemic, the volume and volatility rose between 2.25 and 2.5 times the average.
While this may not come as a surprise to anyone, it’s interesting to note that on the previous day of the Quadruple Witchcraft, December 2019, there was roughly 1.5 times the volatility and almost 3 times the volume.
Aside from these incidents, while the overall market volatility has been higher than normal for most of the time, the overall market volatility has been at or even below normal levels.
Unlike first impressions upon hearing the term quadruple witches, there is nothing supernatural in the market these days.
The contracts for futures and options on indices and individual stocks expire on the same day every quarter.
Since there are four types of contracts expiring, you get the term “quadruple”.
While it was once true that the markets moved “wildly” due to the confluence of these instruments expiring on the same day, many of these fluctuations have simply dissolved for one reason or another.
The increased volume on these days and especially in the last hour may still be there, but most traders need not fear the “witch”.
Disclaimer: The above information applies to For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.