What is a triple witching and how can you trade it?

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. 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. Meanwhile, traders clutching onto these ticking contracts grapple with a pivotal decision.

It only happens four times a year – on the third Friday of March, June, September, and December – which can create a spike in trading volume and volatility. Triple Witching typically occurs on the third Friday of March, June, September, and December. During Triple Witching, traders and investors often try to close out their positions or roll them over into the next expiry month.

1. Many of those are still A.M.-settled, which still creates a noticeably larger opening auction, but still not as significant as the quarterly witching days (Chart 2).
2. Triple witching day is consistently one of the most heavily traded days each year.
3. 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.

When misalignments surface, traders can engage with the devalued entity and concurrently offload the inflated one, ensuring a profit as price paths intertwine. The intensified tumult during this period augments the emergence of such variances, proffering arbitrageurs with more chances. In September 2020, the market where single stock futures were traded, OneChicago, closed and single stock futures ceased trading.

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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. 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. Stock options are contracts that give the holder the right to buy or sell the underlying security by a specific expiration date and at a specific price, known as the strike price.

These news events resulted in increased volatility, and the S&P 500 lost 1.3% while the Dow Jones Industrial Average dropped 1.6%. There can be trading opportunities in both the run-up to, and the day of, a triple witching. You can speculate on whether the price of stocks, stock options, and index futures will rise or fall with FOREX.com. Unlike investing, using derivatives like futures and options carry an expiry date. Triple witching is when the expiration of stock options, stock index futures, and stock index options all fall on the same day. With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year.

Understanding Triple Witching

Triple witching is the quarterly event when the calendar aligns for all the prominent futures and options contracts to expire on the same day. The next triple witching – when stock options and futures expiries collide – happens on March 17. While both triple and quadruple witching https://forexhero.info/ can unveil arbitrage chances stemming from price variances between futures, options, and the stocks themselves, quadruple witching’s extra contract can magnify these pricing gaps. This potentially offers sharp-eyed traders a bigger playground to leverage these differences.

Stock Traders Endure a $3.5 Trillion Triple Witching Event

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. 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. The underlying equity index options and futures generally cease trading the day prior (usually a Thursday). But any investors that still hold open contracts will receive profits (through cash settlement) based on the prices set in the next morning’s open auction.

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. Triple witching occurs when three types have expiry dates scheduled for the same day.

What is Triple Witching? And How Does it Affect Stocks?

I like that this strategy has a high Profit Factor which tells us that winning trades tend to be larger than losing trades. Importantly, not every derivative expires with the underlying stock needing to be delivered. Given index rebalancing is at least as significant as derivatives expiries, many still refer to the date as “Quad Witch,” although the quad now refers to the impact of index trades on the close. In modern trading, triple witching happens on the third Friday of March, June, September, and December (the last month of each quarter).

Chart 1: Auction volumes are elevated on expiration dates

Traders ought to brace for potential volatility spikes and be on guard for unexpected market shifts. The prospect of liquidity challenges and the ripple effects of hefty institutional trades on market mechanics should also be on their radar. Possessing a strategic trading approach paired with a robust risk management blueprint is crucial during these intervals.

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. In summing up, triple witching stands as a noteworthy event in the financial landscape, shaping unique opportunities and hurdles for market enthusiasts. The coalescence of stock index futures, stock index options, and stock options expiration paints a vibrant trading scene, characterized by its sharp volatility spikes and surging trade volumes. 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.

Every third Friday of March, June, September, and December, three financial instruments—stock index futures, stock index options, and stock options—expire at the same time. The way they interact can lead to increased market activity and higher trading volumes. On October 19, 1987, the Dow Jones Industrial Average lost 22.6% in a single trading session. The massive sell orders were left unchecked by any kinds of systematic stop gaps, and so financial markets roiled globally throughout the day. This stock market crash was the greatest one-day decline to occur since the Great Depression in 1929.

Derivative contracts, such as futures and options, derive their value from the price movements an underlying asset. Futures and options contracts are agreements to exchange underlying asset at a future date and price. Triple witching and quadruple witching stand out as two key events in the financial realm. They’re notorious for stirring volatility and driving up trading volumes. While both occasions revolve around the simultaneous expiration of diverse derivative contracts, the specifics of those contracts set them apart, influencing the market in distinct manners. Central to the essence of triple witching is its alignment with stock options’ expiration.

The intricate dance between triple witching and factors like options expiration and arbitrage dynamics adds layers to this financial event. Past instances underscore the gravity of triple witching, revealing its capacity to set off chain reactions in the market. Given its impact, a vigilant stance, backed by a robust understanding and a clear game plan, becomes essential for those diving into this tumultuous trading tide. 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.

They delve into strategies that capitalize on the price variances among correlated financial tools, thereby championing market equilibrium. 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%, fxtm broker 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. He founded the website in 2013, showing traders how to calculate technical indicators.