What Quadruple Witching Expiration Means for Stocks

June expiration is a quadruple-witching week

Senior Quantitative Analyst
Jun 5, 2019 at 7:01 AM
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I'm old enough to remember when there was only one expiration date per month available for options on stocks. It was the third Friday of each month. That's still the most heavily traded expiration date, but with weekly expiration dates now available on so many stocks, there's less focus on how the third Friday of the month affects stocks.

This month, however, is quadruple witching. That means on the third Friday of this month, June 21, not only do stock options expire, but so do stock index futures, stock index options, and single-stock futures.

Commentators often expect a lot of volatility and increased volume during quadruple-witching expirations, as traders are closing contracts and offsetting their options and futures positions before Friday's closing bell. Below, I'll look at the numbers to see how the stock market has behaved during quadruple-witching week and the surrounding weeks.

Next Week Could Be Bearish for Stocks

The table below looks at how the S&P 500 Index (SPX) has performed during specific weeks since 2013, which is when it seems weekly options trading began to ramp up. The weeks surrounding quadruple witching have been bearish. They've been positive just 40% of the time, with the week before (which is next week) averaging a loss of 0.19%, and the week after quadruple-witching week averaging a loss of 0.34%.

Sandwiched between these bearish weeks is quadruple-witching week, which has been good for stocks. These special expiration weeks have averaged a gain of 0.46%, with 72% of the returns positive.

The standard deviation of the returns is highest for quadruple-witching week, compared to other weeks. The week before also has above average standard deviations -- a typical weekly standard deviation since 2013 is about 1.7%. The obvious theory is that this is due to money managers increased activity as they adjust their portfolios, closing out of expiring positions, and opening new ones at future expirations.

sp500 weekly returns since 2013

The Best and Worst Days for Stocks

I was curious how these weeks break down by day. The table below shows the daily returns for the week before quadruple-witching expiration, which is next week. I'm most curious about what happens toward the end of the week, just before expiration week. Friday happens to be the worst day of the week, averaging a loss of 0.22%, with just 44% of the returns positive. One could speculate this is due to money managers not wanting to hold over the weekend heading into the volatile quadruple-witching expiration week.

spx daily returns

This next table shows the daily breakdown of quadruple-witching week. Most of the expiration week's gains come at the beginning of the week. Monday, Tuesday, and Wednesday all average a decent daily gain. Actual quadruple-witching day on Friday has not been a good day for stocks. That day averages a 0.15% loss, and has been positive just 44% of the time.

Interestingly, Friday has a lower-than-normal standard deviation of returns. So, the pundits are right that quadruple-witching week has increased volatility, but actual quadruple-witching day has below-average volatility. For reference, the typical daily standard deviation since 2013 for the S&P 500 Index is 0.81%.

sp500 daily returns quadruple witching expiration


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