The Quadruple Witching Day is when Stock Index Futures, Individual Stock Futures, Stock Index Options, and Stock Options expire simultaneously. While options on stocks and stock indexes expire on the third Friday of each month, all four contract types expire together on the third Friday of the month that closes each quarter: thus, on the third Friday of March, June, September and December.
In practice, what happens is that the simultaneous expiration of the four contract types can result in some increase in traded volumes and thus volatility in the markets. And that is exactly what makes that Friday “Freaky”.
But it was enough for it to be so that in financial circles - rational as it were but in reality not immune to emotionalism and, therefore, to a certain tendency toward superstition - that going up was long ago renamed after the folkloric "Witching Hour." That hour, that is, which strikes at the twelfth chime of midnight, when the boundaries between our world and the world of the supernatural are said to loosen.
Then there is a particularly sensitive time on these days, which corresponds to the last hour of the trading session on Wall Street (3 p.m. to 4 p.m. New York time), from 9 p.m. to 10 p.m. (Italian time). Similar phenomena also happen for exchanges other than the U.S., but in that case the expiration of various contracts is diluted over several time intervals and not in a single hour.
The importance of Quadruple Witching Day
Quadruple Witching Day is also an important moment to understand investor sentiment: at the time when derivative contracts are renewed, a medium-term position is taken on the performance of the stock exchanges and, therefore, there is an in-depth understanding of what the sentiment of the traders themselves is: but what generally happens on the stock exchanges on the quadruple witching day?
usually, a decline in stock indexes is observed in the weeks following the quadruple witching day, as the overall demand for stocks may decline.
It is necessary to consider, however, that the increased availability of hedging instruments with multiple expiration dates throughout the year has somewhat diminished the impact and importance of the quadruple witching day: ergo, although increased volumes usually occur, this is not often linked to increased volatility or lower stock index prices in the weeks that follow.