WASHINGTON, September 19, 2014 – What’s with this “quadruple witching” nonsense we’re hearing about today?
Like all professions and businesses, Wall Street investment types have a professional jargon all their own, and it’s often a lot more colorful than what might imagine in this button-down world of hedge funds and investment banks.
But the colorful terminology is often short hand for what’s really happening, and that’s where the term “quadruple witching” comes in. The term has to do with the trading in various generally shorter term contracts that, by traditional and legal agreement, all must be closed out on a given, specific day.
Once per calendar quarter—to be precise, on the third Friday of March, June, September and December—a total of four option contracts are simultaneously closed out: options on individual stocks, stock futures, stock indexes and stock index futures. If you haven’t traded these contracts out by Friday’s deadline, they expire.
The complex action surrounding these contracts can include any number of things, ranging selling one contract and establishing a new one to actually exercising, say, a stock option to buy or sell shares in a given company at a specific price that’s established in the option contract.
What it boils down to is that four times a year, all four of these contracts expire at the same time, often leading to some wild and often bullish trading in the underlying stocks and/or indexes involved. Due to the more than occasional trading insanity, the hour when these contracts expire and the frantic activities leading up to it came to be dubbed “the witching hour.”
Eventually, the term was generalized to encompass the day or simply stand alone, as in “It’s quadruple witching” today.
Investopedia notes that quadruple witching days are also sometimes known as “Freaky Friday,” possibly in reference to the old Disney comedy film.