Quadruple witching refers to an expiration date that includes stock index futures , stock index options , stock options and single stock futures.

Quadruple Witching

While stock options contracts and index options expire on the third Friday of every month, all four asset classes expire simultaneously on the third Friday of March, June, September and December.

Much of the action surrounding futures and options on quadruple witching days is focused on offsetting, closing or rolling out positions, as well as arbitrage trades, with the result being elevated volume, particularly in the last hour of trading.

Despite the expiration of four contract types, the terms triple witching and quadruple witching are often used interchangeably. One of the primary reasons for the heavy volume on these expiration days is trades on underlying securities are automatically executed on options expiring in the money and expiring futures contracts. Under certain circumstances, positions are opened for the purpose of executing these trades, but derivative-based traders seeking to avoid principal-based transactions must take action to prevent open positions in their portfolios from expiring.

Call options expire in the money when the price of the underlying security is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price. In both situations, the expiration of in-the-money options results in automatic transactions between the buyers and sellers of the contracts.

The seller of a put contract that expires in the money is automatically assigned shares to buy at the strike price.

In both types of contracts, traders can close positions prior to expiration to avoid automatic assignments and executions.

A futures contract contains an agreement between the buyer and the seller in which the underlying security is to be delivered to the buyer at the contract price at expiration. In this situation, contract owners can avoid delivery by either closing their contracts or rolling them out to a forward month.

Over the course of a quadruple witching day, transactions involving large blocks of contracts can create price movements that may provide arbitrageurs the opportunity to profit on temporary price distortions.

Arbitrage can rapidly escalate volume, particularly when high volume round trips are repeated multiple times over the course of trading on quadruple witching days.

Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

Triple Witching

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