The third Friday of the last month of the quarter is a busy day for traders as it is “quad witch” options expiration. This event occurs on the third Friday of March, June, September and December. The four legs of the quad witch include; equity options, index options, index futures and single-stock futures.
“Traditionally, quad witching expirations are some of the busiest days in terms of volume, especially the June expiration because of the other index rebalances.” Chris Dearborn, Managing Director of the Markets Intelligence Desk at Nasdaq. “This doesn’t necessarily mean that the markets see more volatility as quad witch is more of a liquidity factor.”
The last hour of the trading session is referred to as the “quad witching hour” as traders attempt to unwind their futures and options positions before they expire, and, frequently, new contracts are purchased to replace the closed ones. The combined effects of exercise, delivery, hedging and arbitrage and the effect to the underlying security significantly boosts volume and some volatility. Hence, the term “witching hour” because of the market forces at work.
“The big trades to watch are the closing blocks that go off at 4pm ET because that is where traders will see four to five times the amount of average daily volume,” Dearborn explains. “But, for the average retail investor, quad witch is nothing to get spooked about as it doesn’t impact your overall portfolio.”
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