What Is Triple Witching?

Options expiration day is always the third Friday of every month and is typically volatile. For long-term investors who aren’t in and out of the market frequently, triple witching shouldn’t be of much concern and likely doesn’t require any portfolio adjustments. However, volatility is always present in the market—some days more so than others.

Next, we will explore the importance of triple witching and its impact on trading activity, particularly during the final hour of trading known as the triple witching hour. In the context of financial markets, “triple witching” refers to a specific event that occurs on the third Friday of certain months, typically March, June, September, and December. Triple witching day is consistently one of the most heavily traded days each year. The increased volume tends to lead to higher volatility and intraday price swings and stocks can be unpredictable on Triple Witching day. These opportunities might be catalysts for heavy volume going into the close on triple-witching days, as traders look to profit on small price imbalances with large round-trip trades completed in seconds. So, if you want to survive and trade profitably on triple witching days, come prepared, stay disciplined, and only strike when your setup is clear.

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Triple witching, an event in which stock options, index options, and stock index futures all expire on the same day, is known for its heightened trading activity. This phenomenon generates volatility due to increased transactions as traders close, roll out, or offset their positions in these derivatives. Understanding this process can help investors and traders capitalize on potential opportunities during triple witching days.

Triple Witching’s Impact on Derivatives Markets

Triple witching can offer an opportunity for investors to take advantage of a more volatile market and put more money to work. In the last 30 minutes of triple witching, most institutional-level players rush to rebalance or roll contracts. Instead, they are a result of mechanical trading flows as traders adjust their positions. This surge particularly occurs in major indices like the S&P 500 or the Nasdaq. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience.

Preparation and a Acciones de tesla solid understanding of the expiration process are critical when dealing with these quarterly events to minimize risk, seize opportunities, and maintain a well-diversified portfolio. Stay informed about your positions and market conditions to make the most out of triple witching days while mitigating potential risks. Short-Term Arbitrage Opportunities during Triple WitchingArbitrage is a trading strategy that aims to profit from the price difference between two or more related securities. The heightened volume and volatility surrounding triple witching days can generate price discrepancies, making it an attractive opportunity for short-term arbitrage trades.

Please note that this type of prep is a key part of many triple witching strategies.
The increased activity during triple witching days also affects option prices, with implied volatility often increasing due to heightened market uncertainty.
For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index.
Using this information, you can easily decide whether to enter, exit, or avoid a trade altogether.
These include not only quarterly earnings reports and key economic news, but also short-term events like triple witching Fridays.
In both situations, the expiration of in-the-money options causes automatic transactions between the buyers and sellers of the contracts.

While closing or offsetting positions is common during triple witching hours, arbitrage opportunities also emerge due to potential price discrepancies among the expiring contracts. Short-term traders exploit these price imbalances for quick profits and increased trading volume, making triple witching days particularly exciting for active traders. The complex interplay of various derivative expirations adds depth to the markets, contributing to the dynamic nature of financial investing. Triple witching can result in heightened volatility due to increased trading activity surrounding the closing, opening, or offsetting of futures and options contracts. This surge of volume can lead to price inefficiencies and arbitrage opportunities, attracting short-term traders seeking to profit from these market conditions. Triple witching days, which mark the simultaneous expiration of stock options, index options, and index futures, can significantly impact market sentiment due to the heightened trading activity that occurs during these events.

Triple witching and long-term investors

Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero. Much like any other trading day, triple witching offers the opportunity to make profits on a variety of different strategies. Some of the most common strategies utilized on triple witching are highlighted below. The convergence of the three expiration “witches” once every quarter effectively means that a bunch of buyers and sellers are all rushing to settle their positions before the closing bell.

Triple witching and market performance

If the share price closes above the strike price, the option seller has the choice to close the position or let it expire and receive the profit from the difference between the share price and the strike price. Similarly, a put option is in the money when the stock or index price is below the strike price, allowing the buyer to buy the underlying security at the strike price. When an option expires in the money, automatic transactions take place between buyers and sellers of the contracts. Understanding Expiration ProcessesExploring the intricacies behind each derivative’s expiration process can provide valuable insight into the triple witching event.

By watching this behavior in real-time through our tool, Bookmap, you can understand triple witching trading more tactically. Triple witching, typically, occurs on the third Friday of the last month in the quarter. In 2022, triple witching Friday are March 18, June 17, September 16, and December 16. Another aspect to consider on how triple witching could indirectly impact markets is to look at index rebalancing. Index providers periodically tweak the constituents and weights accorded to those constituents in the index based on their methodology. In some cases, this may be true, but triple witching can also be a rather calm event, with lower volatility and a statistical bias to the upside (at lease for S&P 500 futures) during the week of and on triple witching.

Triple witching, typically, occurs on the third Friday of the last month in the quarter.
Sometimes the dynamics of triple-witching result in a less liquid market for a certain security, which increases spreads and creates opportunities for arbitrage, in which a trader exploits price differentials between markets.
Closing a contract involves selling it prior to expiration to avoid taking delivery of the underlying security if you are an owner of the contract.

Triple witching day strategies

All this trading, closing out and exercising can cause a lot of volatility, but it’s more or less the same story two more times, for both stock index options and stock index futures. In sum, the expiration of all three combine to create extra volatility in the markets. As one part of triple witching, traders are closing out or exercising their stock options. For example, traders may be closing options positions, selling to close a long contract or buying to close a short contract. If they have a hedge on these positions using stock, they may also be simultaneously unwinding that hedge, buying or selling the corresponding stock as appropriate. They may simultaneously buy the undervalued stock and sell a corresponding futures contract to lock in profits once the markets converge.

This convergence of multiple expirations can lead to increased trading activity and volatility in the markets. As traders prepare for these days by closing, rolling out, or offsetting positions, potential price imbalances may arise, providing opportunities for short-term arbitrage transactions. Importance of Triple WitchingTriple witching has become noteworthy due to the collective impact of multiple derivatives contracts expiring on the same day.

She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. If you notice sudden shifts in liquidity, like a large buy wall disappearing or a sell wall forming fast, that is a signal that a bigger move is coming. Using this information, you can easily decide whether to enter, exit, or avoid a trade altogether. Triple witching occurs when three types have expiry dates scheduled for the same day. Typically, this phenomenon occurs on the third Friday of the last month in a quarter. In 2023, Triple Witching occurs March 17, June 16, September 15, and December 15.

For example, the seller of a covered call option can have the underlying shares called away if the share price closes above the strike price of the expiring option. These opportunities might be catalysts for heavy volume going into the close on triple-witching days as traders look to profit on small price imbalances with large round-trip trades completed in seconds. Traders may also decide to exercise these stock options, choosing whether to take delivery on long call options and exercise put options. If they’re exercising a long call and taking delivery on the stock, they’ll need cash or enough margin capacity to purchase the stock and may need to sell stocks to fund the exercise of the call.

Triple Witching: What It Means for Traders and How to Handle the Chaos

Stock index futures and options are typically cash-settled, whereas you need to deliver the stock in case of single stock options. Investors, particularly large financial institutions, often offset the new positions by buying or selling the underlying asset as a hedge, which further fuels the increased volume and volatility. Although the four triple witching days represent just a fraction of the 250-plus trading days in a typical year, the stakes are considerable. According to Bloomberg data, during the June 2024 triple witching, about $5.5 trillion worth of options linked to indexes, stocks, and ETFs expired, or “came off the board,” in trader lingo. However, as of 2020, these single-stock futures contracts no longer trade in the U.S. markets. With the demise of single-stock futures contracts, quadruple witching reverted to triple witching.