Options Traders Gear Up for First Quadruple Witching of the Year

The financial markets' Quadruple Witching Day occurs quarterly on the third Friday of March, June, September, and December, marking the simultaneous expiration of stock index futures, stock index options, single stock futures, and stock options. The option event often causes a spike in trading volumes and heightened market volatility. Consequently, Quadruple Witching is usually associated with short-term, significant price swings in equities and derivatives.

While still large relative to recent history, this quarter's triple witching is expected to be smaller than the $5.3 trillion notional seen in December.

Historically, a bullish propensity was spotted for US stocks during the week of the first Quadruple Witching day of the year, according to Stock Trader's Almanac. Over the past 41 years, the S&P 500 has risen 27 times, while the Nasdaq has gained on 25 occasions. More recently, both the S&P 500 and Nasdaq have risen in 12 out of the last 16 "Witching Weeks."

However, the week following Quadruple Witching day often tells a different story, with the S&P 500 experiencing declines in 27 out of the past 41 years—frequently with substantial drops. In 2018, the S&P 500 fell by 5.95%, and the Nasdaq by 6.54%. Notable increases in the subsequent week, like those in 2000 (4.30%), 2007 (3.54%), 2009 (6.17%), and 2020 (10.26%), appear to be historical outliers. Analysts suggest that this quarter's Quadruple Witching may be particularly noteworthy due to the option trading activity surrounding Nvidia, a hot stock in the U.S. market.

Bets on semiconductor stocks have contributed significantly to the surge in options market activity, with contracts linked to Nvidia Corp once again showing some of the greatest demand, according to Goldman Sachs. According to data from SpotGamma, traders continued to prefer calls over puts in semiconductor names as well as other well-liked options trades.

Data indicates that in the final week of February, traders poured as much as $20 billion into Nvidia options, far surpassing trading in other companies of the "Magnificent 7." In the past month, Nvidia option trades have accounted for a quarter of the single-stock options market.

Last Friday, Nvidia's stock price plummeted by 5% with a volatility range of 10%, a move some analysts attribute to the execution of a large number of Nvidia call options. Market makers, when selling call options, often buy Nvidia shares to hedge their risk. The unwinding of these hedges through stock sales occurs after the call options are exercised. Analysts point out that as the weekend approached, traders began to exercise in-the-money Nvidia call options, which subsequently pressured option dealers to sell Nvidia shares to unwind their hedges, contributing to the significant sell-off.