Impacts of Quadruple Witching Hours on Stock Markets and Important Dates
Quadruple witching days, occurring four times a year on the third Friday of March, June, September, and December, are significant events in the financial world. These days mark the simultaneous expiration of options and futures contracts for four major US stock market indexes: the S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, and the Russell 2000.
Understanding the dynamics of quadruple witching can better prepare investors for the potential price movements and enable them to strategize effectively. On these days, transactions involving large blocks of contracts can create price movements that may provide arbitrageurs the opportunity to profit on temporary price distortions.
In the lead-up to a quadruple witching day, contract owners can close their positions by booking an offsetting trade at the prevailing price, thereby cash settling the gain or loss from the purchase and sale prices. It's important to note that in-the-money options automatically exercise on these days, requiring share delivery for calls.
Expiring in-the-money options increase trading volume as shares are bought or sold to close out trades. This surge in activity can potentially lead to increased market volatility, although it's not always the case. Some investors choose to roll their contracts forward, extending the contract by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future.
One E-mini S&P 500 futures contract is worth 50 times the value of the S&P 500. However, it's worth mentioning that the Chicago Mercantile Exchange delisted standard-sized S&P 500 index and options futures contracts in September 2021.
The price of a security may artificially tend toward a strike price with large open interest as gamma hedging takes place, a process known as pinning the strike. This phenomenon occurs when options traders hedge their positions by buying or selling the underlying securities, which can impact the price of the security.
It's essential to note that the search results do not provide information about which institution is responsible for negotiating the three remaining contracts during Triple Witching. This aspect of the process remains an intriguing mystery for many investors.
In conclusion, quadruple witching days present unique opportunities and challenges for investors. By understanding the mechanics of these events, investors can make informed decisions and navigate the market more effectively. As always, it's advisable to consult with a financial advisor before making any investment decisions.
