Quad Witching Day – Bullish or Bearish? (Quadruple Witching Backtest)

Quad witching (quadruple witching) refers to the expiry of four financial derivative contracts on the same day: stock index futures, stock index options, single stock options, and single stock futures (the latter have low volumes and are most likely not a big factor). Our backtests indicate that the quadruple witching week shows strong returns, but the quadruple witching day shows returns much lower than on an average day.

Quadruple witching day – facts vs myths. Because the quadruple witching day is surrounded by presumable myths, we would like to dig deeper into these rare days that happen only four times per year. Is quadruple witching a volatile day? Is the volume higher than normal? Is it a bearish or bullish day? Do derivatives expiration lead to bearish or bullish movements in the last hour of trading? Is it a bearish or bullish week? What about returns the week after quadruple witching day? These are the questions we answer in this article.

Also, the week after quadruple witching shows negative returns due to exceptionally poor performances in June and September.

Financial derivatives are used for a wide variety of reasons: some use them to speculate, some investors add leverage to their portfolios, and other investors and traders use them for hedging purposes.

Supposedly, the expiration of all these contracts creates volatility and high volume due to repositioning. Options and futures are frequently used for hedging positions, among other things, and traders are forced to “roll over” contracts and others might face pin risk due to options assignments. Moreover, market makers are forced to cover positions, and arbitrageurs come in to balance any mispricings.

What is quad witching and when is it?

Quadruple witching happens four times per year during the options expiration week. The options expiration week is when the options expire and this happens on the third Friday every month. But four of those months are called quadruple witching. The day is also called quad witching.

Quad witching calendar (dates)

Quad witching is when all derivative contracts expire – all options and futures contracts expire on this particular day. This is in March, June, September, and December – four times per year.

When are the Quad Witching dates?

The quadruple witching dates in 2023 happen on these days:

• 17 March 2023
• 16 June 2023
• 15 September 2023
• 15 December 2023

The quad witching dates in 2024 happen on these days:

• 15 March 2024
• 21 June 2024
• 20 September 2024
• 20 December 2024

The quad witching dates in 2025 happen on these days:

• 21 March 2025
• 20 June 2025
• 19 September 2025
• 19 December 2025

The quad witching dates in 2026 happen on these days:

• 20 March 2026
• 19 June 2026
• 18 September 2026
• 18 December 2026

Is quad witching a profitable day?

It depends. We day traded stocks for over 15 years and the options expiration Friday was the best day of the month, and our strategy was mainly to “arbitrage” between certain stocks. However, the window of opportunity was slowly closing due to more computers and volume from more sophisticated institutional players.

We believe that the opportunities are even less on the stock indices, like NQ and ES, for example. The market is simply too big. But the backtests done in this article will shed some light on this.

How to backtest quadruple witching?

Options expiration week and quadruple witching are not the easiest strategies to backtest and need a few lines of code to count the Fridays in each month. We did it in Amibroker and the indicator we coded looks like this:

The lower pane shows the declining number of days until each Friday.

You can get the  Amibroker code for the options expiration week plus code for all of the free trading strategies we have published since 2012, in total over 100 different “snippets” or code on this link.

How does quadruple witching influence the markets?

We have never tested the volatility on such a day, except for stocks. Typical was that the NQ and ES futures made some moves in the last two minutes before the opening bell after the imbalances were distributed (that happens at 0928 New York time).

There are most likely many myths and wrong perceptions about the quadruple witching day. We set out to bust or confirm some of these in this article.

Let’s start by looking at the volatility on this particular day:

What is the volatility like on quad witching?

The media likes to write that any quadruple witching and options expiration day is a volatile day. Is this correct?

There is only one way to find out and that is to backtest S&P 500, the main stock index.

The chart below is the average of High minus the Low of the last 50 observations of options expiration day (black line), quadruple witching (blue line – the flat “top” is the observation), and any trading day (red line):

As you can see, we might argue quadruple witching day is perhaps somewhat more volatile than both options expiration day and a random day.

What is the volume like on quad witching?

When traders, market makers, and funds roll over their positions, it should increase the volume, right?

Let’s backtest and find out if the hypothesis is true.

In the chart below the average of the last 50 observations indicate that the hypothesis is indeed correct. The backtest is based on the daily volume in SPY.

The volume on options expiration day (black line) and quadruple witching Friday (blue line) is substantially higher than any random day (red line).

Is quadruple witching day bullish or bearish?

Let’s find out if quadruple witching Friday is positive or bearish for stocks. We backtest the following idea:

• Today is Thursday before quadruple witching and we buy SPY at the close.
• We sell at the close on Friday and thus hold for 24 hours.

The equity curve looks like this:

There are 117 trades, the average loss per trade is 0.1% and the win rate is 51%. For comparison, the average overnight gain on any random day is about 0.05%.

Clearly, quadruple witching day is bearish.

Is quadruple witching week bullish or bearish?

Let’s test if we can make money during the week of quadruple witching week. We do the following backtest:

1. We go long at the open on the first day of the quadruple witching week (Monday).
2. We exit at the close of the options expiration week (Friday).

If Monday is a holiday, we enter on Tuesday. Likewise, if Friday is a holiday, we exit on Thursday.

This is what the equity curve looks like:

The 117 trades have a positive average of 0.45% per trade and the win rate is 61%.

We know that the quadruple witching day is negative, so let’s exit on the day before the expiration date:

The average gain is about 0.6% per trade and the win rate is 65%. (We regard the win rate as one of the most important risk and performance metrics in trading.)

Quadruple witching hour

The stock exchange closes official trading at 1600 ET and options and derivatives expire at that hour. Is the quadruple witching hour bullish or bearish?

Let’s buy ES futures one hour before the close (3 PM) and sell at the close (4 PM). The average gain is a negative 0.08% from 2010:

The win rate is pretty low at 31%, probably the lowest win rate we have ever seen in any S&P 500 strategy.

The quadruple witching hour is bearish.

What is the return the week after quadruple witching?

We know from our backtests of the options expiration week that the week after options expiration has lower average returns than any random week. The four months per year that has quadruple witching is, of course, included in this result.

Let’s backtest the performance by entering at the close of the Friday in the four months of quadruple witching, and we exit at the close the next Friday or five trading days after entry.

This is what the equity curve looks like:

The average gain is a negative 0.05% per trade and the win rate is 42%. As you could imagine, this is significantly lower than any random week. However, it’s worth noting that both March and December show very positive gains. It’s June and September that are the culprits with -0.57 and -0.75 returns respectively. If we are only invested during those two months the equity curve looks like this:

The win ratio is a low 29%. Prior to 1985, the negative effect was much less, but we have to take into consideration that the derivatives market first started becoming a force in the mid-1980s.

Options expiration day (OPEX) video

We have made a video that covers everything about the options expirations:

Quadruple witching day – conclusions:

There are many myths around quadruple witching day. Hopefully, this article has confirmed and “busted” some of these myths. What did we learn? We learned that volatility is slightly higher than any normal trading day, volume is higher than normal, quadruple witching day is a bearish day, quadruple witching week is bullish, and that the last hour of quadruple watching day is bearish.

If you have read so far, we would appreciate it if you could have a peek inside our shop.

FAQ

1. What is quadruple witching day?

• Quadruple witching day, often referred to as “quad witching,” is a significant financial event that occurs four times a year. It involves the simultaneous expiration of four financial derivative contracts: stock index futures, stock index options, single stock options, and single stock futures (with the latter having a relatively low impact).

2. When does quadruple witching day occur?

• Quadruple witching day takes place during the options expiration week, which typically falls on the third Friday of each month. However, quad witching occurs only in March, June, September, and December, making it four times a year.

3. Is quadruple witching a volatile day?

• Quadruple witching day is often associated with increased volatility in the financial markets due to the expiration of multiple derivative contracts. Traders and investors may reposition their portfolios, and market makers adjust their positions, potentially leading to heightened volatility.

4. Is the trading volume higher than normal on quadruple witching day?

• Yes, trading volume is typically higher than usual on quad witching days. The expiration of multiple derivative contracts results in increased trading activity as market participants roll over contracts, adjust positions, and respond to options assignments.

5. Is quadruple witching day generally bearish or bullish?

• There is no consistent pattern in whether quad witching days tend to be bearish or bullish. Market behavior on these days can vary and may depend on various factors, including the broader economic context and investor sentiment.

6. Do derivatives expirations lead to bearish or bullish movements in the last hour of trading on quadruple witching day?

• The last hour of trading on quad witching days can be influenced by the expiration of derivatives, but it’s not guaranteed to be bearish or bullish. The direction of the market movement during this time can be influenced by various factors, including options assignments and traders’ actions.

7. Is the week following quadruple witching day typically bearish or bullish?

• Historically, the week following quadruple witching day has shown negative returns in some cases, particularly in June and September. However, this can vary from year to year and is influenced by broader market conditions.

8. How does quadruple witching influence the markets?

• Quadruple witching can influence the markets in several ways. It often results in increased trading activity, heightened volatility, and potential mispricings that market makers and arbitrageurs may attempt to correct. The specific impact can vary depending on market conditions and other factors.

9. Is quad witching a profitable day for trading?

• The profitability of trading on quadruple witching day depends on various factors, including the trading strategies employed and market conditions. While some traders have historically found opportunities on these days, others may find that the window of opportunity is shrinking due to increased computerized trading and institutional participation.

10. How can I backtest quadruple witching day?

• Backtesting quadruple witching and options expiration week strategies can be done using software like Amibroker. It requires coding to identify the relevant dates and analyze historical market data. The provided Amibroker code in the article can help with this.