A quadruple witching is often a time of great volatility in the financial markets – quadruple witching days are, according to Investopedia, the third Friday of March, June, September and December when stock index futures, stock index options, stock options and single stock futures all expire together.
The striking name refers back to the three witches in Macbeth’s Shakespeare – originally quadruple witching days were just triple witching days, until single stock futures were added to the mix back in 2002. It is also sometimes known as Freaky Friday, as investors in derivatives markets (and the broader market) rush to buy and sell securities in a massive spike in trading volume – in 2006 and 2007 this was estimated as being up to 60% higher than the average daily trading volume for the year.
Values of stock and derivatives can soar and plummet, particularly around the quadruple witching hour, the final hour of stock market trading on Freaky Friday (between 15:00 and 16:00 EST). Contracts are repurchased, position market capitalisations are closed out, and many investors plan weeks in advance for the financial turbulence (and opportunity) presented by quadruple witchings.
Overall, however, although the intraday rise and fall in values of stock options and derivatives can be dramatic, the net effect of a quadruple witching on financial markets tends to be almost negligible. According to senior derivatives analyst Nate Peterson at Charles Schwab, quoted on CNBC.com: “The net effect doesn’t move the market one way or another.” The facts bear out his comment. A typical September quadruple witching has seen the S&P 500 swing as much as nine points over the course of the day, but as trading closes the net change has only been a single point.
As investors have become more cautious in the wake of the financial crisis, many have attempted to shelter themselves from the unpredictable volatility of a Freaky Friday by unwinding trades earlier in the week, but quadruple witching day still sees a substantial spike in trading volume which will probably never be entirely smoothed out.
In short, a quadruple witching affects financial markets by generating a huge amount of trading activity as contracts and options expire, but while this can lead to massive short term fluctuations in the markets, the effects are more or less self-cancelling by the end of the day. An inexperienced investor should certainly tread carefully on the third Friday in the last month of each quarter, but quite often a Freaky Friday is terribly exciting on the day, but something of an anti-climax once trading has closed and the dust has settled.