Swing traders and investors are unlikely to be significantly affected by the event, but swing traders may wish to take note of any statistical biases present during the week of triple witching. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience. New traders will want to be more cautious in the days leading up to and on Triple Witching Friday. Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges.
Strategy: Seasonal Short Trade in AAPL
In 2023, Triple Witching occurs March 17, June 16, September 15, and December 15. The decline into March undercut the breakout level before an April recovery wave remounted support. The fund completed a volume-supported V-shaped recovery pattern in June, returning to the prior high and adding another 12 points into June 10’s all-time high at $248. The fund has given up about 16 points and failed the breakout in the past three sessions, reinforcing resistance in the upper $230s. A test at that level during the next uptick could be instructive, with a buying spike reinstating the breakout, while a reversal would drive another nail into the rally coffin. The SPDR S&P 500 ETF Trust (SPY) topped out above $280 in January 2018 after President Trump fired the first shot in the trade war and sold off into the $250s.
These instruments include stock options, stock index options, and stock index futures contracts. Triple witching occurs on the third Friday of March, June, September, and December, and it can have a profound influence on trading activity, particularly in the final hour of the trading day. It’s important to understand that triple witching is a time when many traders and investors have to close or roll over their positions to avoid physical delivery of the underlying assets.
Such maneuvers can spark pronounced volatility, with the market swaying in response to the abrupt jostle in demand and supply dynamics. 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.
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. Central to the essence of triple witching is its alignment with stock options’ expiration. These contracts, which bestow holders with the right (minus the compulsion) to either procure or dispose of a stock at a preset rate, nudge traders and investors to seal, action, or transition their stances as the expiration looms.
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 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. 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.
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. Traders and investors often realign their positions and secure their portfolios during this time. 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.
Opportunities for Arbitrage
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. 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 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.
The intensified tumult during this period augments the emergence of such variances, proffering arbitrageurs with more chances. Meanwhile, traders clutching onto these ticking contracts grapple with a pivotal decision. They can either conclude their current positions by purchasing or offloading the core asset, neutralizing the initial contract, or transition to a forthcoming expiration cycle. In the latter scenario, they would initiate a fresh contract set for a later expiration, ensuring they maintain their market presence. However, carelessly choosing an expiration date is one of the most common mistakes when trading options, often leading traders astray. They need to navigate the increased activity, looking for good opportunities and trying to avoid potential pitfalls.
- Investors may also choose to rollover their derivative contracts, which means closing out this particular contract that is about to expire and entering into a similar contract that expires at a later date.
- This is a long-short, mechanical (rule-based) swing trading strategy based on stock market return anomalies during the quarterly contract expiration day, also called “Triple Witching Day.”
- The position management amplifies volume, specifically at the end of the trading session Friday afternoon.
- The activity during monthly witching hours is related to rolling out or closing expiring contracts to avoid the expiration and having to buy the underlying asset.
- As a result, there is typically a surge in trading volume and increased volatility in the market.
It returned to the prior peak bonds safety and market crashes in August and broke out, but the rally failed in October, generating a steep decline that undercut first and second quarter lows. A second breakout attempt in May 2019 also failed, carving the second higher low since the fourth quarter of 2018.
What is Triple Witching and How Does it Affect Trading in the Final Hour?
This time is when there are likely heavier trading volumes as traders close out options and futures contracts before expiration. Triple witching itself doesn’t move the stock market; it just creates increased volume. As contract expiration deadlines approach the witching hour, trading activity usually surges as market participants rush to close or roll over positions before it’s too late. Thus, volatility frequently spikes during this frenetic final trading hour across the derivatives markets and their underlying assets, as speculative plays and hedging activities spill over to equities to whip up the market further. Triple witching day occurs four times in a year when the expiration date of three types of derivatives coincides.
Quadruple Witching
Lastly, the very aura of an impending simple trend trading strategies and indicators to beat the market 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. 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.
Options expiration day is always the third Friday of every month and is typically volatile. These news events, taken along with the S&P 500’s quarterly index rebalancing, which also happened that day, caused the S&P 500 to lose 1%. Look for volatile, two-sided price action during this week’s triple trading pyschology articles witching options expiration, with the potential for major benchmarks to complete bearish reversal patterns. A frequent arbitrage avenue during triple witching emerges from the price rifts between stock index futures and their inherent indexes. When misalignments surface, traders can engage with the devalued entity and concurrently offload the inflated one, ensuring a profit as price paths intertwine.
How Can Investors Prepare for Triple Witching Days?
In financial markets, the “witching hour” refers to the last trading hour on the third Friday of each month, when options and futures on stocks and indexes expire. This period is characterized by heavy trading volumes and increased volatility as investors rush to close or roll over positions before the end of the trading day. Double, triple, and quadruple witching can occur when two, three, or four asset class contracts expire simultaneously. These events, particularly triple witching, can be particularly volatile because of the concentration of expiring contracts. In conclusion, triple witching is an event that occurs on the third Friday of March, June, September, and December, where stock options, stock index options, and stock index futures contracts expire simultaneously. The final hour of triple witching can be a time of heightened trading volume, increased volatility, and potential opportunities for profit through arbitrage.
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 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.