What is the Quad-Witch and How to Trade Freaky Friday
The quadruple witch (quad-witch) happens the third Friday of every calendar quarter month (March, June, September and December).
Quad-witch is the simultaneous expiry of the following instruments:
- Stock index options
- Stock market index futures
- Individual stock company options
- Single-stock futures (not commonly traded, was called triple-witch before these were introduced)
Because traders and institutions effectively run out of time on the close of trading, there is a lot of portfolio re-balancing, contract rollovers and more. (Read more about futures contract rollover here.)
The last hour of the trading session (3PM to 4PM EST) is when the volatility really increases and assets swing dramatically.
Quad-witch is also called Freaky Friday.
What is the Quad-Witch: Is it Tradeable?
The first thing to know is that these quad-witch days are not either bullish or bearish. You cannot just buy or short sell and make guaranteed money.
What is guaranteed however, is that there will be a big surge of volatility. There is on average 40% more volume on this day than the average.
During the last hour of the session there is a bias towards the sell side, but it can very.
Day trading can be very profitable in this period of time if you are using the order flow techniques that we teach in our day trader course here.
The most important thing on these days are to follow the volume and keep a close eye if more volume is going through the long or short side.
What is the Quad-Witch: How to Find Trading Levels
As the quad-witch Friday approaches the last few hours, traders get more desperate to close their positions and exercise their options.
One way to take advantage of this desperation is to find out where there is a lot of open interest in the options chains, and take a trade in the direction once we break the level.
This strategy is very similar to another one we talked about on how to find short squeezes. (Read how to find short squeezes with options open interest here.)
The upcoming quad-witch is this Friday, September 15th of 2017.
Looking at an example of the SP500 ES Futures, we can pull up the options open interest and see the following:
- 3,900 calls at 2,480 level
- 1,500 calls at 2,485
- 4,500 calls at 2,490
- 9,900 calls in total between 2,480 to 2,490
You can imagine what might happen if the SP500 index rallies above the 2,490 level. All the short call buyers will need to buy futures to hedge their positions or buy back the options contract.
Both are bullish, causing the index to rally. This would be a great bullish trade opportunity, above 2,490 for a 5+ point opportunity.
On the flip side you can see there are 8,400 put options at 2,400. The same is true for the downside, except it would make a good day trading short opportunity.
Quad-Witch: Adjust Your Stop Loss Orders and Risk Management
It’s at this point I should strongly advise you that Freaky Fridays can get, well… freaky.
The extra volatility is caused because big institutional players are making large trades. Do not fight this momentum.
It’s highly recommended you widen your stop loss to account for the increased volatility. However, this should not increase your overall risk.
You should also reduce your position size to compensate. Less contract size with a wider stop would put you in good position to profit from the quad-witch.
For example, if you risk maximum of $250 USD per trade, with a 5 tick stop on ES futures:
- You can trade 4 contracts on a regular session
- You should stretch quad-witch stop to 8 ticks
- This gives you an adjusted $100 loss per contract
- This means you can trade 2 contracts maximum
- New risk will be just $200 per trade
No matter what product you are trading, you should adjust your risk management strategy on a quad-witch Friday if you plan to be successful. That’s a TRADEPRO tip!
Quad-Witch: Remember the Best Trade Is Often…
No trade at all. Sometimes being a spectator is much better than being on the field in the markets.
Just because you have no trade, it does not mean you are not a trader.
In fact, no trades mean no risk on the table, which makes you a professional risk manager. These are the type of traders that succeed in the long run.
Don’t be afraid to avoid these quad-witch, Freaky Fridays.
Some very successful day traders take these Fridays off and don’t even turn on the computer. That’s okay.
But without experiencing the rush and opportunity of a Quad-Witch day you will never know what is best for you.
I hope you are more confident and ready to tackle the volatility like the professional traders.
Good luck and good trading.
Manage risk, generate profit.
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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.