A comprehensive guide to US Quadruple Witching Day: Why does market volatility suddenly intensify?

What Is Quadruple Witching Day in the US

Every quarter, the US stock market faces a special moment — Quadruple Witching Day. This term originates from the simultaneous settlement of four types of derivative financial products, including single-stock futures, single-stock options, stock index futures, and stock index options.

Why is it called “Witching”? It actually describes the process when the settlement of derivatives causes futures prices and spot prices to overlap, as if an invisible “witchcraft power” is driving prices closer together. This market force, which has no direct relation to corporate fundamentals, often triggers intense price volatility, hence the name.

Even more interesting, the “four” not only refers to four types of products but also represents that there are four such settlement days each year. Since US derivatives settle quarterly, these four special dates fall on the third Friday of March, June, September, and December.

2024 US Quadruple Witching Schedule

For investors, marking these dates in advance is crucial:

Especially note that if investors use leverage for trading, the volatility around these dates may exceed expectations. Be sure to enhance risk management awareness.

Why Does Quadruple Witching Day Trigger Market Movements

The essence of derivatives pricing mechanisms

Futures and options are traded based on “future prices,” not the current spot. When investors are bullish on the future market, futures prices will be higher than the spot; bearish, the opposite. As settlement approaches, the price gap between futures and spot gradually narrows, finally converging rapidly in the last hour of the settlement day — this period is also called the Quadruple Witching Hour.

Settlement prices are usually calculated using the spot average price during the last hour of quadruple witching, which amplifies trading behaviors during this period.

Actual market performance

Quadruple witching day exhibits three notable features:

Explosive increase in trading volume and intensified price fluctuations
— This is the most direct phenomenon. Derivatives settlement requires large amounts of spot delivery or closing positions, with institutional investors and retail traders concentrating their trades at this time.

Rising panic sentiment and frequent chip turnover
— Increased uncertainty causes market participants’ emotions to fluctuate, leading to a significant rise in turnover rates.

Stock prices deviate from fundamentals
— Driven by chip forces, stock prices may temporarily disconnect from their intrinsic value.

The role of market makers

Major capital players tend to take a more active role in controlling the market during quadruple witching. They may use ample funds to push oversold stocks higher and suppress overbought stocks to maximize profits. This behavior is called “market control” and is one of the core factors influencing prices during this period.

Historical data shows that since 1994, in a bullish environment, market makers often push up spot prices on quadruple witching days. However, about 88% of these stocks tend to decline within the following week, with the S&P 500 index averaging a decline of approximately 1.2%.

Different Implications of Quadruple Witching Day for Various Investors

Long-term investors: Can ignore

For long-term holders employing dollar-cost averaging or value investing strategies, the short-term volatility caused by quadruple witching has limited impact. Market prices will ultimately revert to fundamentals, and short-term chip fluctuations won’t alter the long-term value of companies.

Short-term traders and chip analysts: Opportunities and risks coexist

Short-term traders deal with market behavior dominated by chips, which is precisely their area of expertise. During the week before and after quadruple witching, price volatility remains relatively high. Traders expecting oversold rebounds can consider going long; those anticipating overbought corrections may consider short positions.

But here’s a key reminder: All price movements originate from chip factors and are unrelated to fundamentals. Short-term traders must strictly adhere to disciplined trading strategies and avoid “fading” strategies, or they will pay a heavy price in the long run.

Investment Recommendations for 2024 Quadruple Witching Day

The current US stock market remains in a bullish environment driven by AI technology, with market sentiment leaning optimistic. Historically, in bullish years, quadruple witching days tend to rise, while in bearish years, they often decline. As long as no major negative news emerges, it is expected that this year’s quadruple witching will continue the bullish trend.

Another practical tip is that if investors participate via futures or options, unless holding very short-term positions, they should consider rolling over positions several days in advance (extend expiry). This is because liquidity decreases and transaction costs increase near expiry, and higher rollover fees can erode profits.

For quadruple witching day, investors need not panic excessively. Adjusting strategies according to their trading style will help mitigate risks during this special period.