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. If a day trader opts to trade during these weeks, measures should be taken to ensure the strategy being used works in such an environment, or a new strategy can be constructed specifically for this week. Swing traders and investors are forexhero 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.

Sometimes, triple witching events can come and go with little volatility. This is especially true after weekly and daily expirations became available, as activity became more spread out. However, it will all depend on the context in which the event happens, so it’s important to look at news and analysis in the run-up to the witching day. On a triple witching day, nearly double the number of contracts expire than in any other week, which is what creates the market movements that triple witching day is known for. 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.

1. If your option is in the money (ITM), you’ll likely want to exercise it – buying or selling the underlying shares or index.
2. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.
3. Nonetheless, the ephemeral nature of arbitrage windows, coupled with the necessity for adept trading mechanisms and meticulous strategies, can’t be overlooked.
4. While the surge in trading volumes and unpredictability can open doors to gains, they also usher in the chance of abrupt and sizable downturns.
5. Such coinciding expirations can amplify trading volumes and market fluctuations.

For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index. If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, the amount the contract’s owner must pay if the contract expires. 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.

In this case, you’d only incur the cost of the premium you paid to open the position and could take a new position on the next month’s expiry. Triple witching, typically, occurs on the third Friday of the last month in the quarter. In 2022, triple witching Friday are March 18, June 17, September 16, and December 16.

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

They are a hedging tool that was previously banned from trading in the United States. Triple witching sounds like something from a horror movie, but it’s actually a financial term. Options and derivatives traders know this phenomenon well because it’s the day when three different types of contracts expire. It happens only once a quarter and can cause wild swings in volatility, as large institutional traders roll over futures contracts to free up cash. Doing so creates a ton of increased volume—sometimes 50% higher than average, especially in the last trading hour of the day—but individual investors needn’t feel spooked. In fact, some might even view this volatility as a profit-making opportunity.

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. Triple witching itself doesn’t move the stock market; it just creates increased volume.

What Is Triple Witching?

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. But the dance of triple witching doesn’t culminate with contract expirations. The ripple effects of price shifts might prompt mutual funds and exchange-traded funds (ETFs) to readjust their stances, setting the stage for the market’s next act. 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. On the expiration date, contract owners can decide not to take delivery and instead close their contracts by booking an offsetting trade at the prevailing price, settling the gain or loss from the purchase and sale prices.

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These vignettes spotlight the formidable sway of triple witching over market rhythms. When multiple derivative contracts converge towards their expiration, it’s akin to pouring gasoline on the volatility fire. For market players, being attuned to these periodic tempests and recalibrating strategies in anticipation can be instrumental in adeptly steering through the tempestuous waters of triple witching intervals. 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.

For cash-settled derivatives, the hedge needs to be closed out, which (in theory) should create a profit or loss that offsets the settlement cash flow. When this happens, arbitrageurs try to take advantage, often making trades that are completed in mere seconds. An arbitrageur is a trader who looks for price inefficiencies in a security and then seeks to make a profit by buying and selling it simultaneously. Triple witching is the third Friday of March, June, September, and December. Normal monthly and weekly options expiration still occurs on these dates.

This can create a significant amount of trading activity which affects volumes and creates extra volatility in the markets. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date. The position management amplifies volume, specifically at the end of the trading session Friday afternoon. These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets.

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. As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date. 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.

Do You Want More Winning Trades?

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. 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 https://forexhero.info/ is happening. Another aspect to consider on how triple witching could indirectly impact markets is to look at index rebalancing. Index providers periodically tweak the constituents and weights accorded to those constituents in the index based on their methodology. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.

Overall, the average combined cross has been around $108 billion larger on triple witch dates. It’s worth noting that the pandemic did not help the market volatility either, so this tremendous fall in value is attributed to that as well. Triple witching, with its nuanced influences on markets, is nothing short of captivating. Its touch extends beyond mere volatility, molding overarching market dynamics. Stay ahead of the competition and see how much better your trading can be. If you have a trading strategy and want to test it to see how it performs but you’re not sure where to start, or you don’t have the skill set to get it all set up efficiently on your own.

During the Middle Ages, the Catholic Church even banned people from venturing outside during this time, so as not to get caught in the chaos. The next triple witching – when stock options and futures expiries collide – happens on June 18. Learn about what triple witching is and how you can trade a triple witching in the build-up to the next event.

It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary. Triple Witching is a significant event in the world of finance, and it can have a substantial impact on the stock market. In this article, we explore what Triple Witching is, how it works, and its potential impact on the stock market. Alternatively, if the option was out of the money (OTM) at expiry, you might consider letting the contract expire worthless.