Triple Witching: Definition and Impact on Trading in Final Hour

The history of the stock market is filled with dramatic events, and triple witching days have certainly contributed their fair share of excitement. Analysing past occurrences can provide valuable insights into how these events unfold and what lessons traders can glean for the future. However, as of 2020, these single-stock futures contracts no longer trade in the U.S. markets.

1. Some traders tend to be superstitious, believing that these days bring bad luck or are a precursor to unfavorable market shifts.
2. More often, traders will use terms such as “triple witching,” which is the expiration of stock options, index options, and index futures on the same day.
3. When multiple derivative contracts converge towards their expiration, it’s akin to pouring gasoline on the volatility fire.
4. It’s pivotal for traders because the convergence of these expirations can heighten market volatility, amplify trading volumes, and present arbitrage opportunities.

Upcoming Triple Witching Days in 2023 & 2024:

The simultaneous expiration of multiple derivatives can create temporary price inefficiencies. Savvy traders often seek out arbitrage opportunities that arise from price disparities between the underlying assets and their derivatives. The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities. In addition to above-average volume, traders can expect increased volatility.

Mind over Market

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.

This surge in volume can lead to increased volatility, making the market prone to sharp price swings. Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying u s. dollar index futures security. Triple witching refers to the concurrent expiration of stock options, stock index futures, and stock index options.

Opportunities for Arbitrage

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. 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 How to buy gencoin can incite profound market tremors as portfolios recalibrate and positions pivot. They need to navigate the increased activity, looking for good opportunities and trying to avoid potential pitfalls. We’ll go into more detail about Triple Witching, how it affects the market, and how you can work with it.

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. Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money. Investors may also choose to exercise their contracts or accept assignment. Options that are in the money are similar for those holding expiring contracts.

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. Triple-witching is of greatest concern to active traders whose derivatives are expiring. The last hour of the session, the triple-witching hour, brings a flurry of activity that can affect liquidity. Sometimes the dynamics of triple-witching result in a less liquid market for a certain security, which increases spreads and creates opportunities for arbitrage, in which a trader exploits price differentials between markets. The intertwining of these three facets can weave a dense tapestry of trading actions that markedly influence the market.

So, while witching days stand out for active trading, the last witching hour stands out even more as the frenzy hits a maximum before the inevitable expiration and settlement activity in the moments ahead of the stock market close. Triple witching day is consistently one of the most heavily traded days each year. The increased volume tends to lead to higher volatility and intraday price swings and stocks can be unpredictable on Triple Witching day. Triple witching is the quarterly event when the calendar aligns for all the prominent futures and options contracts to expire on the same day. Because of the heightened volatility on this day, it can be an attractive opportunity for short-term traders and even long-term investors who may want to take advantage of a potential short-term dip and put money to work.

While many investors are focused on Triple Witching Day itself, I decided to analyze a period of several trading days before and after the expiration date. Triple witching is an unusual market phenomenon that can cause increased volatility, though it happens only four times per year. Triple witching can offer an opportunity for investors to take advantage of a more volatile market and put more money to work. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. 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.

To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or alpari forex broker review requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Investors, particularly large financial institutions, often offset the new positions by buying or selling the underlying asset as a hedge, which further fuels the increased volume and volatility.

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. Triple witching day occurs four times in a year when the expiration date of three types of derivatives coincides. Triple witching hour, typically, is referred to the last hour of trade on that day. While triple witching days may see some market volatility, not all trades occur in the last hour. 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.