The Impact of Quadruple Witching on Financial Markets: From Concepts to Trading Strategies

How Quadruple Witching Day Sparks Market Volatility

There are four days each year when the trading volume in the US stock market becomes exceptionally high, and price fluctuations are far more volatile than usual. These days are commonly referred to as Quadruple Witching Days among investors. Many traders remain vigilant ahead of these days because market movements often have little to do with company fundamentals and are primarily driven by market sentiment and positioning.

The essence of Quadruple Witching is simple: it is the settlement date for the four major types of US derivatives. These include single-stock futures, single-stock options, stock index futures, and stock index options. As the settlement date approaches, futures prices and spot prices tend to converge, leading to intense battles over market positioning. This process can cause market prices to be pulled by an “invisible force,” hence the name Quadruple Witching.

Why “four”? Because the US derivatives market settles once each quarter, totaling four times a year, specifically on the third Friday of March, June, September, and December.

Key Settlement Dates in 2024

Investors should mark these dates and prepare for risk management:

If you are trading with leverage, be especially cautious on these days, as sudden surges or crashes could trigger forced liquidations.

Why Do Quadruple Witching Days Trigger Market Movements?

Typical phenomena on Quadruple Witching Days include: surging trading volume, intense price swings, and rising fear indices. While these may seem chaotic, they hide an internal market logic.

Derivatives traders buy and sell “future price commitments.” If the market expects prices to rise, futures will trade above the spot; if it expects a decline, futures will trade below the spot. As the settlement date nears, this spread must narrow. The settlement price is usually calculated based on the average spot price during the last hour of trading on the Quadruple Witching Day, known as the Quadruple Witching Hour, which is a critical window for market makers to exert influence.

Market makers’ actions become especially apparent during this period. To make the settlement price favorable for themselves, they will actively push the spot prices toward certain levels—lifting falling stocks and suppressing rising stocks. This price distortion, driven by market power, often exceeds the influence of fundamental or technical factors in daily trading.

Historical Data and Patterns

Since 1994, statistical analysis shows that most years in the US stock market have been bullish. Market makers anticipate rising prices and, to protect profits, tend to push the spot prices higher during Quadruple Witching. However, in reality, about 88% of these artificially inflated stocks tend to retreat within the following week, and the S&P 500 typically drops by an average of 1.2%.

This pattern is not absolute. In years when the overall trend is bearish, Quadruple Witching can lead to declines. Occasionally, there are reverse margin calls, where overly aggressive retail traders trying to “get in on the action” end up overwhelming the market makers, causing a short squeeze.

Short-term Traders vs. Long-term Investors’ Strategies

For long-term investors, the volatility caused by market manipulation during Quadruple Witching is just “noise” that can be ignored. Stock prices will ultimately revert to fundamentals, and short-term distortions do not alter the long-term trend.

However, short-term traders, especially those focused on market sentiment and positioning, regard these four days as the most critical of the year. Massive capital inflows and heightened activity by market makers mean that price volatility around these days can be significantly amplified. Those expecting oversold rebounds can consider going long; those anticipating overbought corrections might consider short positions.

The key point is that these fluctuations are unrelated to fundamentals—they are purely a game of market positioning. They are suitable only for short-term trading. Never trade with hope or stubbornness. Discipline is the dividing line between success and failure in short-term trading.

Key Points for Investors in 2024

Based on historical patterns, bullish years tend to see Quadruple Witching Days with overextended gains, while bearish years tend to see declines.

Currently, the US stock market is still driven by AI-related themes, with a generally bullish tone. As long as there are no major reversals, there is a high probability that the strong momentum will continue through 2024’s Quadruple Witching Days. Investors should closely monitor market performance around these dates.

Additionally, if participating in the market via derivatives, it is advisable to roll over positions in advance unless engaging in purely short-term trades. Liquidity tends to decrease near settlement, transaction costs increase, and rollover itself incurs additional expenses, which may outweigh the benefits.