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. 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. That means the third Friday in of March, June, September, and December. He founded the website in 2013, showing traders how to calculate technical indicators.
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 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.
- 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.
- Futures and options contracts are agreements to exchange underlying asset at a future date and price.
- 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.
- On the expiration date, futures and options (if exercised), must be settled which means either the underlying asset needs to be delivered or the settlement is made using cash.
- 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.
- 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.
With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year. 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.
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 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. Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security.
Derivative Contracts Expiring On Triple Witching Day
SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. A futures contract, an agreement to buy or sell an underlying security at a set price on a specified day, mandates that the transaction take place after the expiration of the contract. Triple witching day is consistently one of the most heavily traded days each year.
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. 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.
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. This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. At Tradinformed we are committed to helping you become a better trader.
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 https://www.forexbox.info/what-is-the-best-automated-trading-platform/ 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. The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities.
Triple Witching’s Impact On Investors & The Market
Any references to quadruple witching are about the three types of contracts above expiring simultaneously. 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 best stocks for the wheel strategy 2021 with an average of 7.5 billion average the previous 20 trading days. 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.
An Example of Triple Witching
Stay ahead of the competition and see how much better your trading can be. Triple Witching is a market phenomenon that happens four times every year. Triple witching is the third Friday of March, June, September and December. In 2023, Triple Witching occurs March 17, June 16, September 15, and December 15.
What Are Some Price Abnormalities Seen on Triple-Witching Dates?
Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility. 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.
Normal monthly and weekly options expiration still occurs on these dates. The last hour of trading can be especially volatile as investors scramble to exit positions before the market closes. U.S.-style put and call options give their buyer the right to buy or sell the underlying at any time up to the expiration date. European-style put and call options give their buyer the right to buy or sell the underlying only on the expiration date. 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.
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. However, the average volume almost doubled to 4 million on the four triple witching trading days. Triple witching is the third Friday of March, June, September, and December.
As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date. Options traders also find out if their options expire in or out of the money. 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. 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.
Triple Witching has historically given provides some excellent short trading opportunities. During the last 11 years of (mostly) bull market, the days around triple witching have tended to fall. Many traders are nervous about triple witching, but with the information in this article, you will be https://www.forex-world.net/stocks/boeing/ able to minimize your risk and increase your profits. 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. Triple witching, typically, occurs on the third Friday of the last month in the quarter.