Quadruple Witching Today!

What on Earth is Quadruple Witching?

Four times a year the Market has a day referred to as Quadruple Witching.  This day is the third Friday of the end of each Quarter.  Every March, June, September and December marks the end of a quarter.  Guess what today is?  That’s right, the final Quadruple Witching Event of 2021.

So, why Quadruple?  This is in reference to the four major contracts that close on this day.  Those four contracts are as follows:

Options Contracts

Index Options

Single Stock Futures Contracts

Index Futures

As you can see, we have both Stock Options and Futures, which represent two types of contracts and both Index Options and Futures, which makes for the other two types of contracts.

Contracts 101

Without going in a long, drawn out and detailed explanation of each type of contract, let’s instead focus on what an Options contract is and what a Futures contract is.

Options:

The buyer of an Options contract gives them the right but not the Obligation to complete the transaction and accept the goods involved in the contract.  For example, a buyer who is long APPLE may take out an Options contract anticipating the rise in the value of APPLE.  The contract will be for the control of 100 Shares of APPLE.  The contract will have a Price that APPLE will need to be at or over by a specific date in the future.  The Buyer of the contract has the right to purchase those 100 shares if APPLE exceeds his price or the buyer can simply settle in cash at expiration and not receive any shares.  If the price of APPLE was to not meet his Options contract price, then his Option would expire worthless.

Now, to make Futures easier to understand, we can simply say that a Futures contract does not give the buyer the option to settle or not settle.  The buyer is expected to take delivery of the goods in the contract.

Why Should I Care?

For Traders and Investors it always comes down to this – why should I care?  Will this witching event affect my portfolio?  Will this Quadruple Witching make me money, make me lose money, give me opportunities to get into trades, etc…

The very nature of Options are that they automatically execute on the buyers behalf at expiration.  So, in the money Calls or Puts will auto execute the trade.  This adds to volume in the market.  This move is anticipated by other market participants so we end up seeing a long day of volume building up to the Witching Hour.  The Witching Hour is the last tradeable hour of the Quadruple Witching day.

This is when all the decisions need to be made.  A trader could stand to lose millions of dollars in Options or Futures contracts if the underlying asset closes a penny higher or a penny lower than what they needed.  This makes for decisions in the market to be made by other participants that stand to lose big or small on the contract side of things.  This also closes out longer term hedge positions that investors take against their portfolio in an effort to not have to sell down their portfolio.  

Simply put – expect Volume and likely Volatility.  The Volume is a given, the Volatility largely depends on the trading that happened well before the events of the Quadruple Witching.  In other words, we may so no volatility if the market has more or less reached equilibrium but we can see massive volatility if we are near the top of an extended rally or near the bottom of a panic sell off.  

Nevertheless, even for a spectator, it’s a fun day in the market!

 

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