Quadruple magic corresponds to an exceptional trading day during which four types of derivative products expire simultaneously.
The expression might make you smile. But investors are wary of those stock market days when trading volumes and volatility reach record levels.
These dates qualify as a very special period in which events crowd the markets for technical reasons. Let's see in more detail what these dates represent and how they affect the market.
What is quadrilateral magic?
The Quadruple Magic Days are held on the third Fridays of March, June, September and December, thus coinciding with the end of the school term.
These days are considered very exceptional because on this date many contracts related to derivative products expire.
Therefore it logically leads to big movements in the stock market. In particular, investors must liquidate or “roll over” their positions to the next maturity date.
These four Witch Fridays are therefore characterized by a particularly high transaction volume as operators make technical adjustments when buying or selling.
Finally, we also talk about the “Quadruple Witching Hour”. It corresponds to the last hour of transactions on these specific days, a crucial moment when everything happens and where we often see important discrepancies due to transaction volumes.
Dates of the Witch Quartet 2024
Quadruple witching trading days occur on the third Friday of March, June, September and December. These are the key dates when traders should pay close attention to market movements. For 2024, the Quadruple Magic dates will be March 15, June 21, September 20, and December 20.
Is Quadruple Magic bullish or bearish?
Quadruple magic itself is neither bullish nor bearish in nature. The impact on the market can vary, with some Quadruple Magic days seeing big spikes and others being stagnant. It largely depends on the current market sentiment, which positions are closed, and how traders decide to manage their portfolios these days.
History of quadrilateral magic
In 2002, the first “Four Witches Day” occurred. Before that year, it was only triple witching where the first stock futures contracts were traded in 2002. Triple witching is similar to quadruple witching but involves only three types of financial contracts that expire. It predates the concept of quadruple witching, which added individual stock futures to the mix.
Types of contracts included in quadrilateral magic
These days, four derivative products expire at once. These include options on indices and stocks as well as futures on indices and stocks as well. If all options as well as index futures expire every month, then stock futures expire only every three months. It is the conjunction of the four events that occurs only once every quarter.
- Stock options
- Index options
- Index futures
- Individual stock futures
Stock options
Stock options are contracts that give their holder the right, but not the obligation, to buy or sell a specific stock at a predetermined price (strike price) before the contract expires.
There are two main types: call options, which give the right to buy, and put options, which give the right to sell. Stock options are a popular way for investors to speculate on stock price movements or hedge existing stock positions.
Index options
Index options are similar to stock options but are based on market indexes rather than individual stocks.
These financial derivatives give traders the right to buy or sell the value of an underlying index, such as the Dow Jones Industrial Average (DJIA) or the S&P 500, rather than dealing with specific stocks.
Index options are used to hedge against market movements, speculate on the future direction of the market, or gain exposure to a broad sector of the market through a single transaction.
Futures contracts for index
Index futures are standardized contracts to buy or sell a financial index at a future date and at a specified price. Unlike options, which give the right but not the obligation to buy or sell, futures carry the obligation to fulfill the terms of the contract.
Traders use index futures to hedge against market risk, speculate on future movements of market indices, or adjust portfolio exposures without having to buy or sell the actual stocks that make up the index.
Individual stock futures
Single Stock Futures (SSFs) are futures contracts on individual stocks. It obliges the buyer of the contract to buy a specified number of shares of a particular stock, and the seller to sell it, at a predetermined date and price in the future.
SSFs combine the market exposure of stock trading with the leverage and flexibility of futures trading. They allow investors to speculate on the future price direction of individual stocks or hedge their stock portfolios.
The convergence of these contract expirations on quadruple witching days dramatically increases trading activity, as traders and investors close, roll over or modify their positions.
This coordinated expiration can increase liquidity and volatility in the markets, as the simultaneous settlement of these contracts requires a large number of buy and sell orders.
Understanding the market characteristics and functions of these contracts helps traders navigate the complexities of quadruple witching days and make informed decisions amid heightened market activity.
Market impact of quad witches
Traders often close out or put futures contracts to manage their positions, resulting in increased trading activity. In fact, it is not uncommon to see extreme tension in order books just minutes before deadlines.
Traders cannot switch to the next expiry date, and must close their position before it does so automatically. Liquidity is rarely present. Therefore, latecomers find themselves facing difficulty, which sometimes leads to unexpected incidents.
Moreover, arbitrage opportunities here can have their advantages and disadvantages. Quadruple magic can provide arbitrage opportunities when price differences arise. However, increased volatility can increase risks significantly.
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Quadruple witching greatly affects stock and futures trading by converging the expirations of four types of contracts. This event increases trading volume and market volatility. It occurs on the third Friday of March, June, September, and December, drawing traders' attention to potential shifts in the market.
The effect of quadruple magic on the market can vary, neither being completely bullish or completely bearish. It includes expiration dates for stock options, index options, index futures, and individual stock futures.
These contracts allow traders to speculate, hedge or leverage positions across individual stocks and market indices. Increased activity can lead to opportunities and risks, especially in arbitrage.
