What Is Quadruple Witching and Can You Invest In It?

by Hank Coleman

What Is Quadruple Witching and How To Invest During It?What is quadruple witching and can you use the phenomenon to your advantage when trading stocks? Should you even bother? Quadruple witching is the expiration of stock options and stock futures at the same time. And, it only takes place only four times throughout the year. 

Quadruple witching takes place in March, June, September, and December on the 3rd Friday of the month. It requires options and futures investors to close out their trading positions across stock options, single stock futures, stock index futures, and stock index options on the exact same da. And, the phenomenon is often associated with higher than normal trading volumes on the stock exchanges in the United States.

What Is Quadruple Witching?

Quadruple witching is a calendar phenomenon whose name may be far worse than its actual occurrence. The name conquers up thoughts of witches casting spells of doom and gloom on Wall Street. But, that’s not quite what’s going on of course. 

During quadruple witching, many options and futures investors must let go of their futures and options positions before the contracts expire at the end of the day. Investors may notice a fury of investing activity if you watch CNBC, Fox Business News, and the other business television news networks, especially during the final hours of market trading in the United States. 

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The strange sounding phenomenon often forces investors to repurchase contracts and/or sell their market positions closing our their contracts. Investors must finish their futures and options contracts on the expiration day. They have the option to repurchasing – or rolling over their positions – or closing out all of their options and futures positions.

All of this market activity by the options and futures traders often leads to a very noticeable increase in trading volumes for the day on the NYSE, NASDAQ, and other stock markets in America. Many estimate that trading volume during quadruple witching days can be a high as 50% more than normal trading day. There can often be an increase of intraday volatility as well.

At the end of the day, the name quadruple witching is a lot more bark than bite. For the typical investor, you may barely even notice when the day is or the spike in trading volume on the stock exchanges. For most investors who practice dollar cost averaging in the 401k retirement plans and the like, they will barely notice. And, that’s a good thing! 

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Take Advantage of Quadruple Witching

For the most part, typical investors should probably just ignore the four days out of the year that are quadruple witching. But, sophisticated investors can use exchange traded funds (ETF) in some cases to take advantage of the volatility in the stock market and increased trading volume.

There are several ETFs that are quite liquid and tend to focus on volatility. If you have questions, you should seek out the advice of a qualified advisor who can help you invest and trade in markets with high volume and increased trading volatility.

Watch Out For Bid – Ask Spreads

Quadruple witching will not likely to interfere with the typical investor’s plans if you are investing for the long term, maximizing your retirement accounts, and using dollar cost averaging to purchase your investments.

But, investors need to understand that there is a potential for wider than normal bid and ask, the difference between prices sellers and buyers quote each other on stock exchanges (both computer and humans), because of higher average trading volume.

This can be important to the average investor who is actually looking to purchase or sell stocks on a day that happens to fall on one of the four days of quadruple witching during the year. if you want to avoid added risk during quadruple witching, your best strategy may be to wait to invest until the following Monday.

Take the day off. Turn the television off and stop watching so many financial news networks. Simply avoid the day and placing trades if you are nervous about the volatility and the trading volume of quadruple witching. Sometimes, the best investing trade that you can make is to do nothing at all.

Is quadruple witching all it’s cracked up to be? Should typical American investors even pay any attention to quadruple witching?

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.

Hank Coleman has written 578 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.

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