Quadruple witching is a rare derivative expiration event where 4 different derivative types expire on the same day.
This large number of derivative expiration’s leads to significant trading volume in the stock market as traders buy and sell shares to cover derivative positions and readjust portfolios in response to profits and losses from expired derivative positions.
Quadruple Witching In Trading
The large trading volume that takes place on quadruple witching days is the result of the legal obligation to meet the terms of derivative contracts, some of which are not cash-settled or which have an option to not be settled by cash.
A large relative volume of trades leads to more variability in prices. In addition, the often forced nature of the trading in the underlying stock in large blocks means that many traders are forgoing the usual steps that they would take to ensure that they enter or exit a position on the most favorable terms.
These factors combined create an ideal situation for arbitrageurs, as the derivatives traders are often forced to ‘leave money on the table’, which is a rare event in the highly competitive and efficient modern markets.
Quadruple witching days are ideal events for day traders.
Not only is high volatility the natural hunting ground for day traders and an environment where their particular trading strategies shine, but the rare opportunities for arbitrage trades represent a much greater potential for profitable trades using the experience and skills that day traders are the masters of.
While quadruple witching days represent an opportunity for most types of traders, day traders in particular are extremely well-placed to make quadruple witching days by far the most profitable trading days of the year.