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. While both triple and quadruple witching 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. 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.

Triple Witching: Definition And Impact On Trading In Final Hour

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. Triple witching denotes a distinct market event when stock options, stock index futures, and stock index options expire concurrently. This simultaneous expiration intricately weaves together the trajectories of these three financial entities, sculpting the market’s pulse. In the U.S. stock market, the last hour of the trading day, before the closing bell, sees the most trading activity, so the witching hour is from 3–4 pm EST. In folklore, the “witching hour” actually happens in the dead of night, from 3–4 am.

Triple Witching Impact on the Market

However, the average volume almost doubled to 4 million on the four triple witching trading days. 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. 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.

While single stock futures trade elsewhere internationally, they no longer trade in core liquidity markets broker review the United States. Triple witching, with its nuanced influences on markets, is nothing short of captivating. 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. Based on this research, we have developed trading strategies mentioned below, available to TradeMachine’s paid members. Our research in this field is still ongoing, and we expect to deliver more OpEx (day/week) related strategies in the near future.

The position management amplifies volume, specifically at the end of the trading session Friday afternoon. Triple witching and quadruple witching stand out as two key events in the financial realm. 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. At the same instant that the derivatives contracts expire, the anticipatory hedges that traders have placed become unnecessary, and so traders also seek to close these hedges, and the offsetting trades result in increased volume. These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets.

For example, futures contracts that are not closed require the seller to deliver the specified quantity of the underlying security or commodity to the contract buyer. Options that are in the money, that is, profitable, may mean the underlying asset is exercised and assigned to the contract owner. In both cases, if the contract owner or contract writer can pay for security to be delivered, the contract must be what you need to start crypto trading 2021 closed out before expiration. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date.

What happens to stocks on triple witching day?

A futures contract is also referred to as an “anticipated hedge” because it’s used to lock in prices on future buy or sell transactions. These hedges are a way to protect a portfolio from market setbacks without selling long-term holdings. Triple witching occurs on the last Friday of each trading quarter (i.e., March, June, September, and December). 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. 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.

Financial Literacy Matters: Here’s How to Boost Yours

This often involves “rolling out” the contract, which means closing the current position and opening a new one for a future date. The actions surrounding futures and options contracts are especially pronounced on triple witching days, as traders aim to manage their exposure and avoid unwanted outcomes. When it comes to the world of finance, there are certain terms and events that hold a significant impact on the markets. One such event is triple witching, which refers to the simultaneous expiration of three different types of financial instruments on the same day.

1. However, these strategies have risks and are not recommended for less experienced traders.
2. Traders and investors need to be aware of these dynamics and adjust their strategies accordingly to navigate the market effectively during this time.
3. They must decide whether to exercise the options, close them, or let them expire.
4. It sold off through the fourth quarter, coming to rest at a 15-month low in the $140s, and bounced back to the high in April 2019.

The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities. The triple witching takeaway is that investors should be aware of what happens on these days and understand that there is a lot more volume in the markets. There could be some drastic price swings, but investors shouldn’t be carried away by any short-term emotions (which, really, is great advice any day in the markets). This is what generates the increased trading activity, and the large trades, especially from offsetting trades, can cause temporary price distortions. 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.

With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year. 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. Stock index futures and options are typically cash-settled, whereas you need to deliver the stock in case of single stock options. 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.

Index providers periodically tweak the constituents and weights accorded to those constituents in the index based on their methodology. 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. In sum, the spectacle of triple witching necessitates an intricate dance of vigilance, adaptability, and foresight. While it unfolds its drama, those well-prepared can not only safeguard their positions but also potentially tap into the plethora of opportunities it unfurls.

As the hour of triple witching draws near, key players like institutional investors and hedge funds recalibrate their hedging blueprints, seeking to shield their assets from potential market turbulence. This might involve orchestrating a mix of transactions across stock options, index futures, or other derivatives. To create a hedge against the probable ebbs and flows in the asset values they hold. Last Thursday marked the unofficial start of triple witching options expiration, with the rollover of June futures contracts into the September forward month at many brokers. The period from the rollover through this Friday’s expiration have a well-earned reputation for whipsaws and reversals, raising the potential for high volatility.

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 windsor brokers review 2021 options positions to the next contract expiration. 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.

Parallelly, arbitrage scopes between stock index options and their component stocks beckon. Disparities between an index option’s valuation and the combined rates of its integral stocks can be capitalized upon by engaging with the undervalued facet and relinquishing the inflated one. Indeed, as our intuition suggested, after carefully studying the performance of different contracts during the quarterly expiration weeks, we were able to spot some interesting patterns that we can try to exploit. The reversal is nearing the confluence of the 50- and 200-day EMAs as well as round number support at $300 and the .618 Fibonacci retracement level, raising the odds for a string bounce. However, the on-balance volume (OBV) accumulation-distribution indicator failed to keep up with bullish price action during the three-month bounce, stalling at the .618 retracement.