Quadruple witching occurs four times a year and refers to the third Friday of March, June, September, and December.
The reason that trading volume and volatility increase is because trades are automatically executed on expiring futures contracts and on options contracts that expire “in-the-money.”
Call options expire “in-the-money” when the price of the underlying security is higher than the strike price at expiration. Put options expire “in-the-money” when the price of the underlying security is lower than the strike price at expiration.
In either case, the expiration of “in-the-money” options results in automatic transactions between the buyers and sellers of the option contracts. If investors do not want automatic assignments and executions, then they can close out their option positions prior to expiration.
On a quadruple witching day, the increase in trading volume and volatility affects the prices of the underlying security and of the derivative contracts themselves. To long-term investors, this may not be a big deal. To short-term investors, they will want to approach this trading day expecting trends in market prices to be either higher or lower.
During a quadruple witching day, there may be transactions involving large blocks of contracts that can cause price movements and temporary price distortions. This creates an arbitrage opportunity. An arbitrage opportunity is when an investor simultaneously buys and sells a security in different markets or in derivative forms in order to profit from the difference in price. Arbitrage can also rapidly escalate trading volume.
The quadruple witching days are unique trading days that should be approached differently by investors than regular trading days. On quadruple witching days, investors can expect higher market volume and volatility. This will affect the price of the underlying security and of the derivative contracts. With this in mind, investors should strategize how they want to approach these changes in price in order to best maximize their chances of profiting on a quadruple witching day.