Triple Witching Explained: Definition and Stock Market Impact

They can either close out their positions or roll them over into the next expiration cycle. Closing out a position involves selling the financial instrument back into the market. Rolling over a position involves selling the current financial instrument and simultaneously buying the same instrument with a later expiration date. Central to the essence of triple witching is its alignment powertrend with stock options’ expiration. Such maneuvers can spark pronounced volatility, with the market swaying in response to the abrupt jostle in demand and supply dynamics. 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.

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  2. Lastly, the very aura of an impending triple witching can recalibrate trader behaviors.
  3. When multiple derivative contracts converge towards their expiration, it’s akin to pouring gasoline on the volatility fire.

Short-term traders should adapt their strategies to these conditions, avoid trading, or reduce their position size if they notice their performance deteriorates during this time. When the trio – stock options, stock index futures, and stock index options – culminate their life cycle simultaneously, it triggers a tectonic recalibration in the market landscape. Traders and investors, in a flurry, realign paxful review or dissolve their positions in the wake of expiring contracts. This flurry, marked by an upsurge in trading volume, often catalyzes pronounced price oscillations and an unpredictable market demeanor. Triple Witching occurs on the third Friday of March, June, September, and December, when three types of derivative contracts—index options, index futures and single stock options— expire simultaneously.

Triple Witching Explained: Definition and Stock Market Impact

Typically, this phenomenon occurs on the third Friday of the last month in a quarter. It’s worth noting that the pandemic did not help the market volatility either, so this tremendous fall in value is attributed to that as well. For the week leading into the triple-witching Friday, the S&P 500, Nasdaq, and the Dow Jones Industrial Average (DJIA) were up 2.9%, 3.8%, and 1.6%, respectively. However, it seems much of the gains happened before the triple-witching Friday because the S&P 500 and DJIA increased only 0.50% and 0.54%, respectively, that day. Triple Witching occurs on the third Friday of March, June, September, and December. As market practitioners, we are not just interested in anomalies themselves but in ways we can exploit them to make money.

Triple Witching Day

Any references to quadruple witching are about the three types of contracts above expiring simultaneously. Options that are in the money are similar for those holding expiring contracts. 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.

The increased volume tends to lead to higher volatility and intraday price swings and stocks can be unpredictable on Triple Witching day. Stock options, stock index futures, and stock index options all expire on Triple Witching days. Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges. As traders navigate this event, understanding its potential for increased liquidity and market efficiency, as well as its inherent volatility and complexity, becomes crucial. A frequent arbitrage avenue during triple witching emerges from the price rifts between stock index futures and their inherent indexes.

Key Considerations During Triple Witching

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 all three types of contracts; stock index futures, stock index options, and stock options all expire on the same day causing an increase in trading. td ameritrade forex review Stock futures can often jump or fall between 0.5% to 1% (or more) within seconds, as these contracts expire or are about to expire. Triple witching does not include all of the stock index futures and options contracts, so even though they are the most talked-about expiration events, they are not the only expiration days.

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. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.

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