Definition of quadruple witching’
Quadruple witching refers to the date that entails the simultaneous expiration of stock index futures, options on stock indices, stock options & single stock futures. While contracts for stock options and index options expire on the third Friday of each month, all four asset classes expire simultaneously on the third Friday of March, June, September and December. Most of the action surrounding the futures and options on quadruple witching days is focused on offsetting, closing or rolling out positions as well as arbitrage trades, as a result of increased volume, particularly in the last hour of trading.
Quadruple witching is similar to triple witching dates when three of the four asset classes expire simultaneously, or double witching, which involves only two.
Breaking down the ‘quadruple witching’
Quadruple witching to replace a triple witching day, when the single stock futures began trading in November 2002. Despite the expiration of the four types of the contract, the terms of the “triple witching” and “quadruple witching” are often used interchangeably. One of the main reasons a large amount in those days period is that trades on REPO securities are automatically executed on options which expire in the money and expiration of futures contracts. Under certain circumstances, positions are opened for the purpose of execution of these transactions, but OTC traders seeking to avoid the basic operations should take steps to prevent open positions in their portfolios from expiring.
The option expires “in the money” when the price of the underlying asset exceeds the strike price in the contract. Options “in the money” when the stock or index price is below the strike price. In both cases, the expiration of in the money options the results of automatic transactions between buyers and sellers of contracts.
With call options, which are usually written on shares held in the portfolio of the writer, shares will be automatically revoked at the strike price, which will be purchased by the buyer of the contract. The seller put contract that expires in the money are automatically assigned the shares on the purchase at the strike price. In both types of contracts, traders can close the position before expiration to avoid automatic assignment and execution.
Closing and rolling out futures contracts
A futures contract contains the entire agreement between buyer and seller, where the asset needs to be delivered to the buyer at the contract price at the expiry. For example, the Standard & Poor’s 500 e-mini contracts, which make up 20% of the size of an ordinary contract, is estimated by multiplying the index by 50. Contract at a price of 2,100, the cost is $105,000, which will be delivered to the contract holder if the contract remains open at the expiry. In this situation, contract owners may avoid the delivery or the closure of their contracts or roll them in a month.
During the day of quadruple witching, deals with large blocks of contracts can create price fluctuations, which can ensure the arbitrageurs an opportunity to profit on temporary price distortions. The arbitration may rapidly increase, especially when large amounts of round trips are repeated several times in the course of trading on quadruple witching days.