Triple Witching: Definition and Impact on Trading in Final Hour

Call options expire in the money, that is, are profitable when the underlying security price is higher than the strike price in the contract. Put options are in the money when the stock https://www.topforexnews.org/books/listen-free-to-day-trading-for-dummies/ 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.

An arbitrageur is a trader who seeks price inefficiencies in a security and then buys and sells the security simultaneously to make a risk-free profit. The terms "triple witching" and "quadruple witching" are often used to describe occasions on the third Friday of March, June, September, and December. For about 20 years, they had one difference, but since 2020, they have referred to the same event. Liquidity generated by large trade volume during triple witching makes a good time for indexes to rebalance. Any changes in the indexes leads to portfolio adjustments by index-based securities such as index funds.

  1. The term "triple witching" refers to the extra volatility resulting from the expiration dates of the three financing instruments, and is based on the witching hour denoting the active time for witches.
  2. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience.
  3. This is usually more pronounced in stocks with smaller market caps or those that trade heavily in the derivatives market.

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. Trading volume leading up to this third Friday of the month had increased market activity. Trading volume March 15, 2019, on U.S. market exchanges was 10.8 billion shares, compared with an average of 7.5 billion average the previous 20 trading days. Triple witching bitcoin diamond price chart market cap bcd coin essentials is often said to cause volatility in the underlying markets, and in the expiring contracts themselves, both during the prior week, and on the expiration day. Options expiration day is always the third Friday of every month and is typically volatile. The term "triple witching" refers to the extra volatility resulting from the expiration dates of the three financing instruments, and is based on the witching hour denoting the active time for witches.

Stock Index Options

With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year. 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. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets. Also, some traders might take up a straddle strategy, holding both a put and a call option with the same strike price and expiration date, to try to profit from large price swings in either direction. However, these strategies have risks and are not recommended for less experienced traders. Options that are in the money are similar for those holding expiring contracts.

Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets. 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. 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.

What Are Some Price Abnormalities Seen on Triple-Witching Dates?

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. Triple witching is a term that refers to the third Friday of March, June, September, and December, when the quarterly expiration of stock options, stock index futures contracts, and stock index options contracts all occur on the same day. On triple witching days, during the last hour of trading before the closing bell, https://www.day-trading.info/5g-stocks-should-benefit-from-strong-u-s-spectrum/ there can be increased trading as individual and large institutional traders close their positions, roll out, or offset their expiring positions. 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.

While triple witching days may see some market volatility, not all trades occur in the last hour. 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. 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. Caution is in order at this time since these price changes don't often reflect shifts in the underlying company's fundamentals.

Derivative Contracts Expiring On Triple Witching Day

On such days, traders with large positions in these contracts may be financially incentivized to try to temporarily push the underlying market in a certain direction to affect the value of their contracts. The expiration forces traders to act by a certain day, causing trading volume in affected markets to rise. Triple witching does not directly move the market higher or lower, all it does is temporarily increase trading volume and liquidity. 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.

In this situation, the option seller can close the position before expiration to continue holding the shares or let the option expire and have the shares called away. However, in 2020, OneChicago, the exchange where single stock futures were traded shut down. While single stock futures trade elsewhere internationally, they no longer trade in the United States. The last hour of trading can be especially volatile as investors scramble to exit positions before the market closes. Although the name sounds ominous, triple witching day has nothing to do with Halloween or scary stories.

Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security. Triple witching day is often accompanied by increased volatility and trading volume because traders and institutional investors must close or roll their expiring futures and options positions to the next contract expiration. 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. 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.

The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities. 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. In addition to above-average volume, traders can expect increased volatility. SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. Single stock futures began trading in November 2002 and each contract represented 100 shares of stock.

Triple witching is the simultaneous expiration of stock options, stock index futures, and stock index options contracts, all on the same trading day. This happens four times a year, on the third Friday of March, June, September, and December. The expected expiration date for the three might increase trading volume and cause unusual price changes in the underlying assets. 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 day occurs four times in a year when the expiration date of three types of derivatives coincides. Triple witching hour, typically, is referred to the last hour of trade on that day.

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