Should Investors Fear Upcoming Quadruple Witching Hour?
This quarterly event can result in extreme volatility in underlying stock prices, as well as in the broad market. In the past, the volatility would be limited to Friday’s final trading hour, but recently the spin-off has been spread throughout the week, thereby downplaying its impact to some extent. Nevertheless, investors will be expecting some erratic movement in the market in the upcoming week. Quadruple Witching Hour has evolved from the original Triple Witching Hour which began in the eighties at which time index options, stock options and index futures would all expire on the morning of the third Friday of March, June, September and December. These occasions were marked by increased trading volumes, notable changes in volatility and extreme swings in the stock market. At a later date, stock option expiration was shifted to the Friday afternoon, thereby limiting the time period for volatility and leading to the terms Triple Witching Hour, Triple Witching Date, or Triple Witching Expiration. The introduction of single stock futures in 2002, led to “Triple” becoming “Quadruple”, as it is known today.
Despite the somewhat “spooky” name, there is nothing sinister about this multiple contract expiry event. It is natural to expect an increase in trading volume at this time as investors make their move to manage their portfolios, making choices such as to close their obligations, exercise their contracts, roll over to new expiration months, or allow themselves to be assigned. Interestingly, three of the top daily volumes recorded for the New York Stock Exchange occurred on Triple Witching Dates. However, volatility was rather subdued when compared to the extreme volatility of the eighties. Some believe that this decrease in volatility can be attributed to the changes in expiration times, as well as changes in the overall market structure with the introduction of digital trading which has result in improved timeliness of order executions.
So, although options investors should be aware that there is potential for increased activity in the markets on the Quadruple Witching dates, it is certainly nothing to be apprehensive about.