Stock Traders Endure a $3 5 Trillion Triple Witching Event

what is triple witching

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 questrade review during triple witching. 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.

These combined maneuvers swell the trading volume and can usher in marked market oscillations. Hence, during the triple witching phase, the marketplace becomes a hotspot for those keen on leveraging this volatility. Many traders might venture into speculative arenas, acquiring options contracts in the hope of a market tilt favoring them, a move that could culminate in lucrative outcomes.

what is triple witching

Triple Witching occurs on the third Friday of March, June, September, and December. 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.

Triple Witching’s Impact On Investors & The Market

On Triple Witching, traders and investors who hold these financial products are faced with a decision. 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.

what is triple witching

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. December 2008’s triple witching is etched in market memory after the Dow fell 680 points and a recession was declared. Amidst the cataclysmic financial meltdown, an already turbulent market landscape was further shaken by the expiring contracts. Specifically, on December 19, 2008, the Dow Jones Industrial Average rode a rollercoaster, gyrating over 200 points throughout the day, only to culminate 65 points above its opening position. This fervent activity underpinned the compounded volatility injected by triple witching into an already fragile market milieu. They need to navigate the increased activity, looking for good opportunities and trying to avoid potential pitfalls.

There have been quadruple witching days when single stock futures expired on a triple witching day. 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. That means there remains an overnight risk, but typically no way to hedge gamma (the rate of change in delta hedges required for options to be completely hedged).

How Can Stock Traders Avoid Triple Witching Volatility?

Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading. Overall, total daily share volume is also typically 44% higher on “witching” days compared to a “normal” day. We also typically see a higher lit market share due to an increase in more volume trading on-exchange in the opening and closing crosses.

  1. Thus, while triple witching can unfurl enticing arbitrage openings, traders should embrace them judiciously, backed by astute strategies to adeptly sail the intricate market waters and optimize success probabilities.
  2. It’s essential for traders and investors to recognize the potential pitfalls and prospects during triple witching intervals.
  3. Triple witching sounds like something from a horror movie, but it’s actually a financial term.
  4. 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.
  5. Stock index options give the holder the right to buy or sell a stock index at a specific price on or before the expiration date.

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. Triple Witching occurs because the expiration dates for stock options, stock index futures, and stock index options all fall on the same day. Stock options give the holder the right to buy or sell a stock at a specific price on or before the expiration date.

When is triple witching in 2022?

These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets. 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.

The intention is to have a tradable strategy with lower drawdown and a higher MAR ratio than the underlying instrument. You can compare the net profit, compound annual growth rate (CAGR), max drawdown and MAR ratio. You will see that avoiding triple witching has improved performance compared to buy and hold. I do all my analysis in Excel and you can see the results of each trading strategy compared to the underlying instrument.

Nonetheless, the ephemeral nature of arbitrage windows, coupled with the necessity for adept trading mechanisms and meticulous strategies, can’t be overlooked. Imposed costs, like transactional outlays and cost of bid-ask spreads, might dilute profit margins. Thus, while triple witching can unfurl enticing arbitrage openings, traders should embrace them judiciously, backed by astute strategies avatrade scams to adeptly sail the intricate market waters and optimize success probabilities. Although the name sounds ominous, triple witching day has nothing to do with Halloween or scary stories. Triple witching is simply the term given to four unique trading days each year. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility.

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. Triple witching 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. Concurrently, stock index futures, contractual obligations to transact a stock index on a forthcoming date, see their culmination during this period. Esteemed among institutional investors as hedging instruments, the twilight of these contracts is marked by a hive of adjustments, amplifying the market’s erratic heartbeat. Single stock futures began trading in November 2002 and each contract represented 100 shares of stock.

Typically, this phenomenon occurs on the third Friday of the last month in a quarter. Lastly, the very aura of an impending 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. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt. They delve into strategies that capitalize on the price variances among correlated financial tools, thereby championing market equilibrium. Today, such ideas aren’t taken any more seriously than mere superstition, but triple witching can cause chaos among investors, if they are not aware of what is happening.

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 there’s an increase in these transactions. 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.

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. Triple witching does not directly move broker finexo 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.