Quadruple Witching Day is approaching: Trading pitfalls that US stock investors must know

Every quarter, US stock traders frown — Quadruple Witching Day is coming. Why do these four special days cause the market to “go crazy,” with price swings so intense that they catch everyone off guard?

What exactly is Quadruple Witching Day?

Quadruple Witching Day refers to the day when the four major US derivative financial products expire simultaneously, including single-stock futures, single-stock options, stock index futures, and stock index options. It’s called “Witching” because the prices of futures and spot markets tend to tug at each other at settlement, as if controlled by an invisible force.

It occurs four times a year, on the third Friday of March, June, September, and December. The 2024 dates are:

Why do prices go crazy on these four days?

The core secret of Quadruple Witching Day lies in chips rather than fundamentals. Futures and options are essentially predictions of future prices. As expiration approaches, the price differences gradually converge. In the last hour (called the “Witching Hour”), the market uses the average spot price during this hour as the settlement benchmark.

A large influx of capital occurs at this time. Market makers (the main liquidity providers for futures and options) actively manipulate the market to favor their own settlement prices:

• Stocks that are oversold are pushed up → Market makers profit from long positions
• Stocks that are overbought are pushed down → Market makers profit from short positions

The result is explosive trading volume, prices deviating from fundamentals, and retail traders’ herd behavior amplifying volatility.

Shocking patterns revealed by historical data

According to statistics from 1994 to present, US stocks have been in a bullish trend for many years, with market makers habitually pushing spot prices higher for settlement on Quadruple Witching Day. But what happens afterward?

88% of stocks that are overbought decline within the following week, and the S&P 500 typically drops by 1.2%.

This is because market makers push prices to unreasonable heights. After settlement, without new buying support, retail traders take profits, and stock prices fall back.

How does Quadruple Witching Day affect different investors?

Long-term investors → Can ignore it, as prices will eventually revert to fundamentals.

Short-term traders → An opportunity for profit. During the week before and after Quadruple Witching, price volatility far exceeds normal days. Traders focused on chips can exploit these irrational swings for arbitrage. For example, buying on oversold rebounds or shorting on overbought declines.

Leverage traders → The highest risk group. The intense volatility can lead to forced liquidations. It’s crucial to reduce leverage or exit early.

How should investors prepare for 2024?

Since US stocks are still driven by AI bullishness, it’s expected that this year’s Quadruple Witching will continue the overbought trend followed by a correction.

Investment tips:

• Keep a close eye on the 2024 dates, start monitoring positions one week before Quadruple Witching
• If participating via futures or options, avoid short-term speculation; consider early position adjustments to prevent liquidity issues and increased costs before expiration
• Don’t blindly chase highs; remember 88% of overbought stocks eventually fall back
• Strictly implement stop-loss orders during volatile periods; avoid holding onto losing positions

Quadruple Witching Day is both a risk and an opportunity. The key is to understand the market’s chip-based nature and not be misled by short-term price movements, which can violate sound investment discipline.