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Triple Witching Explained: Definition and Stock Market Impact

what is triple witching

Four times a year, contracts for stock options, stock index options, and stock index futures all expire on the same day, resulting in much higher volumes and price volatility. The stock market may seem foreign and complicated to many people, and “triple witching days” is one of those concepts that may seem overly sophisticated, when in fact it’s quite simple. Triple witching can influence individual stocks such as those with large options or futures contracts set to expire. As traders adjust or close their positions, there can be unusual movement in the stock’s price and volume. This is usually more pronounced in stocks with smaller market caps or those that trade heavily in the derivatives market.

The heightened trading activity on triple witching days can create temporary pricing inefficiencies, attracting arbitrageurs who seek to profit from these anomalies. These traders engage in high-volume transactions to capitalize on small price discrepancies, often completing these trades in a very short time frame. “Triple witching does not directly move the market higher or lower, all it does is temporarily increase trading volume and liquidity,” noted SA analyst Marcia Wendorf. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date. The position management amplifies volume, specifically at the end of the trading session Friday afternoon. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets.

The intensified tumult during this period augments the emergence of such variances, proffering arbitrageurs with more chances. In tandem, stock index options’ expiration, which grants holders the prerogative to engage with a stock index at a designated rate, weaves into the triple witching tapestry. With these tools being the linchpin for mutual funds and colossal investors in counteracting market perils, their expiration can incite profound market tremors as portfolios recalibrate and positions pivot.

Triple Witching’s Impact On Investors & The Market

Such maneuvers can spark pronounced volatility, with the market swaying in response to the abrupt jostle in demand and supply dynamics. As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date. Triple witching, encompassing the convergence of stock index futures, stock index options, and stock options, emerges as a standout event in the financial markets. With its arrival on the third Friday of certain months, it introduces both windows of opportunity and areas of potential concern for those immersed in the financial world. Triple witching emerges as a cardinal juncture in financial markets, recurring quarterly on the third Fridays of March, June, September, and December. It’s at this intersection that stock options, stock index futures, and stock index options draw the curtains, inducing a choreographed interplay amidst them and the broader markets.

  1. This might involve orchestrating a mix of transactions across stock options, index futures, or other derivatives.
  2. However, carelessly choosing an expiration date is one of the most common mistakes when trading options, often leading traders astray.
  3. A stock index option gives its holder the right, but not the obligation, to buy or sell a contract that represents the value of an underlying index on a specified date and at a specified price.

Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt. They delve into strategies that capitalize on the price variances among correlated financial tools, thereby championing market equilibrium. Triple witching is the third Friday of March, June, September, and December. Normal monthly and weekly options expiration still occurs on these dates.

Of course, most participants in the future markets will close their open positions prior to the delivery requirement. So if an investor (or firm) owns 3 March Futures contracts on the S&P 500, they may chose to sell 3 offsetting March Futures contracts on the S&P 500, while eliminated their obligations. To avoid this, the contract owner closes the contract by selling it before the expiration. After closing the expiring contract, exposure to the S&P 500 index can be continued by buying a new contract in a forward month. Much of the action surrounding futures and options on triple-witching days is focused on offsetting, closing, or rolling out positions.

A futures contract, an agreement to buy or sell an underlying security at a set price on a specified day, mandates that the transaction take place after the expiration of the contract. Options contracts offer the right, but not the obligation, to buy (call options) or sell (put options) the underlying asset at a set price by a certain date. As options approach their expiration date, those that are “in the money” (i.e., have value) lead to strategic decisions for the holders. They must decide whether to exercise the options, close them, or let them expire. This can lead to automatic executions and significant movements in the underlying stocks, especially when large numbers of options are involved.

Long-only traders and active investors can avoid triple witching by going to cash in all or part of their portfolio around the time of triple witching. Many traders are nervous about triple witching, but with the information in this article, you will be able to minimize your risk and increase your profits. U.S.-style put and call options give their buyer the right to buy or sell the underlying at any time up to the expiration date. European-style put and call options give their buyer the right to buy or sell the underlying only on the expiration date. This increase in trading activity can cause temporary distortions in price.

Derivative Contracts Expiring On Triple Witching Day

Traders and investors often realign their positions and secure their portfolios during this time. Triple witching refers to the third Friday of March, June, September, and December when three kinds of securities—stock market index futures, stock market index options, and stock options—expire on the same day. Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets.

what is triple witching

Based on this research, we have developed trading strategies mentioned below, available to TradeMachine’s paid members. Our research in this field is still ongoing, and we expect to deliver more OpEx (day/week) related strategies in the near future. Indeed, as our intuition suggested, after carefully studying the performance of different contracts during the quarterly expiration weeks, we were able to spot some interesting patterns that we can try to exploit. Lastly, the very aura of an impending triple witching can recalibrate trader behaviors. Some might opt for the sidelines, preferring to bypass the whirlwind of volatility, while others might dive headlong, lured by the prospects spawned by these market undulations.

Triple Witching and its Ripple Effect on Markets

Triple witching, marked by the synchronized expiration of stock options, stock index futures, and stock index options, unravels a tableau of arbitrage prospects for discerning traders. Arbitrage, the art of leveraging price disparities across varied markets or instruments, demands an astute market acumen. As the hour of triple witching draws near, key players like institutional investors and hedge funds recalibrate their hedging blueprints, seeking to shield their assets from potential market turbulence. This might involve orchestrating a mix of transactions across stock options, index futures, or other derivatives. To create a hedge against the probable ebbs and flows in the asset values they hold. Because multiple derivatives (futures and options) are connected to a similar underlying asset class, volume spikes and the above-average trading volume can create unpredictable price action.

A stock index option gives its holder the right, but not the obligation, to buy or sell a contract that represents the value of an underlying index on a specified date and at a specified price. An index option can have an index futures contract as its underlying asset. The U.S. stock market witnessed significant volatility during the triple witching phase, culminating with the Dow Jones Industrial Average securing a gain exceeding 9%. This tumultuous period was a blend of the pandemic’s market repercussions and the expiration of derivative contracts during triple witching. These vignettes spotlight the formidable sway of triple witching over market rhythms.

Triple Witching Explained: A Comprehensive Guide for Traders

These combined maneuvers swell the trading volume and can usher in marked market oscillations. Hence, during the triple witching phase, the marketplace becomes a hotspot for those keen on leveraging this volatility. Many traders might venture into speculative arenas, acquiring options contracts in the hope of a market tilt favoring them, a move that could culminate in lucrative outcomes. Triple witching denotes a distinct market event when stock options, stock index futures, and stock index options expire concurrently. This simultaneous expiration intricately weaves together the trajectories of these three financial entities, sculpting the market’s pulse.

Caution is in order at this time since these price changes don’t often reflect shifts in the underlying company’s fundamentals. Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security. Triple witching refers to the concurrent expiration of stock options, stock index futures, and stock index options. Such coinciding expirations can amplify trading volumes and market fluctuations.

Call options expire in the money, that is, profitable when the underlying security price is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price. In both situations, the expiration of in-the-money options causes automatic transactions between the buyers and sellers of the contracts. As a result, triple-witching dates are when there’s an increase in these transactions.

Long/Short – Trade Triple Witching Strategy

The increased volume and price fluctuations triggered by triple witching cause traders to take action on the underlying assets. This brings in arbitrageurs who use high-frequency trading to try to take advantage. Besides triple witching days, there are also double witching days which occur when two classes of options on the same underlying securities expire on the same day. There have been quadruple witching days when single stock futures expired on a triple witching day. While an options contract may or may not be exercised by the owner, a futures contract carries definitive obligations to carry out the agreed terms. The buyer of a futures contract must pay the contracted price on the expiry date, and the seller of the futures contract must deliver the contracted asset for the established price.

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