Why does the market experience intense volatility during the quadruple witching day? Trading pitfalls investors must know

There are four days each quarter when investors’ phones will be ringing nonstop — these are the so-called Quadruple Witching Days. Many people watch the bouncing candlesticks on the screen, puzzled about why prices are so crazy during these days.

The Three Market Phenomena Behind Quadruple Witching Days

On the day of quadruple witching, the market exhibits a very noticeable feature:

Trading volume explodes. The trading volume far exceeds normal levels, with liquidity so abundant that it doesn’t look like usual. The VIX soars, turnover increases significantly, and both retail and institutional investors are fighting for shares. Prices become disconnected from fundamentals. The rise or fall of stocks or indices often bears no relation to their actual value, purely driven by market sentiment and capital battles.

These three phenomena together are the most prominent features of quadruple witching days.

What is a Quadruple Witching Day? Why is it called that?

A quadruple witching day is the settlement date for the four major types of derivative financial products in the US, including single-stock futures, single-stock options, stock index futures, and stock index options.

Imagine that futures prices and spot prices usually differ, but as expiration approaches, the gap between them gradually narrows. On the settlement day, futures prices must align with the spot prices. This forced alignment process is like an invisible force pulling the prices. This force, unrelated to fundamentals, can cause huge price swings, so it’s nicknamed “the power of the witches,” and the date is called Quadruple Witching Day.

Why “four”? Because there are exactly four times a year. These derivatives settle quarterly, on the third Friday of March, June, September, and December, totaling four times annually.

The four Quadruple Witching Days in 2024

Q1　March 15 (Friday)
Q2　June 21 (Friday)
Q3　September 20 (Friday)
Q4　December 20 (Friday)

Mark these dates on your calendar, especially if you use leverage. Be cautious to avoid forced liquidations caused by amplified volatility.

How do traders manipulate prices on quadruple witching days: the profit tricks of market makers

The essence of derivatives trading is betting on “future prices.” In a bullish expectation, futures prices will be higher than spot; in a bearish expectation, the opposite. But as expiration nears, the price difference must converge to zero.

The settlement price is usually based on the average spot price during the last hour of the quadruple witching day, called the Quadruple Witching Hour, which is a fiercely contested battleground.

Market makers (usually sellers of futures or options) will demonstrate their “market control” skills on this day. They will invest heavily to push prices into ranges most favorable to them — artificially boosting oversold stocks or suppressing overbought ones, ensuring profits at settlement.

Retail investors, noticing this pattern, also start “taking advantage of the market makers,” which results in trading volumes on quadruple witching days almost being the highest of the year.

Historical data reveals a pattern: after a surge, prices tend to fall

Statistics are quite interesting. Since 1994, in the context of a long-term bull market in US stocks, market makers often push up spot prices forcibly on quadruple witching days. But these stocks that are driven higher have a startling aftereffect: 88% will decline within the following week, with the S&P 500 dropping an average of 1.2%.

Why is this? Because the prices driven up by market makers usually exceed the market’s true demand. Once the settlement day passes, if there are no new buyers, retail investors start taking profits, and prices naturally fall back.

Of course, there are exceptions. If the entire market is bearish that year, quadruple witching might be a decline; if too many short sellers push the market down, it can also cause a squeeze on the market makers.

The impact of quadruple witching on different investment styles

Long-term investors don’t need to pay too much attention. Stock prices will eventually revert to fundamentals; the volatility during quadruple witching is just short-term noise.

Short-term traders should be cautious. During the week before and after quadruple witching, prices are especially volatile, driven purely by supply and demand. This presents opportunities for traders focusing on chips, but also traps — if they misjudge the direction and push against the market, they could suffer heavy losses.

The advice is: buy oversold stocks or short overbought stocks, but remember, this is purely a short-term game of chips, unrelated to company fundamentals. Never violate discipline; long-term profits depend on it.

Reminder for investors involved in derivatives: rollover strategies

If you are trading futures or options, it’s recommended to rollover positions in advance, not wait until the week of quadruple witching. The reasons are threefold:

Liquidity will significantly decrease, slippage costs will increase; trading costs will rise; and the risk of forced liquidation near expiration will spike.

Investment strategies for 2024 quadruple witching days

Current environment assessment: The US stock market is still riding the AI bull wave. It’s expected that in 2024, quadruple witching will continue its trend of overextension — as long as the overall market doesn’t experience a major reversal.

Investors should closely monitor market directions and adjust their positions flexibly around quadruple witching days based on bullish or bearish signals. But remember one iron rule: this is a chips game, not value investing. Strict stop-losses and quick entries and exits are the keys to success.