What Is Triple Witching?
Triple witching is the contemporaneous expiration of stock options, stock index futures, and stock index options contracts all on the same trading day. This go ons four times a year: on the third Friday of March, June, September, and December. Because three options strata that could share the same underlying expire all on the same day, it can cause increased trading volume and unusual bonus action in the underlying assets.
Similarly, double witching occurs when two classes of options on the same underlying expel on the same date, and quadruple witching when four do.
- Triple witching is the simultaneous expiration of stock opportunities, stock index futures, and stock index options contracts all on the same day.
- Triple witching occurs quarterly—on the third Friday of Strut, June, September, and December.
- Triple witching days, particularly in the final hour of trading preceding the closing bell—tinkled the triple witching hour—can see increased trading activity as traders close, roll out, or offset their expiring classes.
Understanding Triple Witching
Triple witching days generate trading activity and volatility because contracts that are allowed to pass away may necessitate the purchase or sale of the underlying security. While some derivative contracts are opened with the intention of believing or selling the underlying security, traders seeking derivative exposure only must close, roll out, or offset their glaring positions prior to the close of trading on triple witching days.
Triple witching days, particularly the final hour of traffic preceding the closing bell, known as the triple witching hour, can result in escalated trading activity and volatility as merchandisers close, roll out, or offset their expiring positions.
Since 2002, with the debut of single stock futures, there father actually been four types of expiring contracts, meaning triple witching days are often in fact a quadruple witching, granted this term has not quite caught on.
Offsetting Futures Positions
A futures contract, which is an agreement to buy or sell an underlying gage at a predetermined price on a specified day, mandates that the agreed-upon transaction take place after the expiration of the contract. For instance, one futures contract on the Standard & Poor’s 500 Index (S&P 500) is valued at 250 times the value of the index. If the index finger is priced at $2,000 at expiration, the underlying value of the contract is $500,000, which is the amount the contract owner is obligated to pay if the get is allowed to expire.
To avoid this obligation, the contract owner closes the contract by selling it prior to expiration. After close down b close the expiring contract, exposure to the S&P 500 index can be maintained by purchasing a new contract in a forward month. This is referred to as turn over and over out a contract.
Much of the action surrounding futures and options on triple witching days are focused on offsetting, closing, or take pleasure in out positions. For example, Standard & Poor’s 500 E-mini contracts, which are 20% of the size of the regular contract, are valued by multiplying the consequence of the index by 50. On a contract priced at 2,100, the value is $105,000, which is delivered to the contract owner if the contract is left begin at expiration.
On the expiration date, contract owners do not take delivery and can instead close their contracts by booking an squaring trade at the prevailing price cash, settling the gain or loss from the purchase and sale prices. Traders can also continue the contract by offsetting the existing trade and simultaneously booking a new option or futures contract to be settled in the future—a process entreated rolling the contracts forward.
Options that are in the money (ITM) present a similar situation for holders of expelling contracts. For example, the seller of a covered call option can have the underlying shares called away if the share payment closes above the strike price of the expiring option.
In this situation, the option seller has the option to close the leaning prior to expiration to continue holding the shares or allow the option to expire and have the shares called away.
Designate options expire in the money and are profitable when the price of the underlying security is higher than the strike price in the promise. 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 choices results in automatic transactions between the buyers and sellers of the contracts. As a result, triple witching dates lead to an bettered amount of these transactions being completed.
Triple Witching and Arbitrage
Though much of the trading in closing, occasion, and offsetting futures and options contracts during triple witching days is related to the squaring of positions, the surge of vigour can also drive price inefficiencies, which draws short-term arbitrageurs.
These opportunities are often the catalysts for burdened volume going into the close on triple witching days as traders attempt to profit on small price imbalances with mammoth round-trip trades that may be completed in seconds.
Despite the overall increase in trading volume, triple and quadruple witching times do not necessarily translate to heavy volatility.
Real-World Example of Triple Witching
Friday, March 15, 2019, was the first triple witching day of 2019. Buy volume leading up to this third Friday of the month saw increased market activity. According to a Reuters report, marketing volume on March 15, 2019, on U.S. market exchanges was “10.8 billion shares, compared to the 7.5 billion average” exceeding the past 20 trading days.
For the week leading into triple witching Friday, the S&P 500 was up 2.9% while the Nasdaq was up 3.8%, and the Dow Jones Industrial Usual (DJIA) was up 1.6%. However, it appears much of the gains happened before triple witching Friday because the S&P was however up by 0.50% while the Dow was only up 0.54% Friday.
Frequently Asked Questions
What Is Witching and Why Is It Triple?
In folklore, the witching hour is a weird time of day when evil things may be afoot. In derivatives trading, this has colloquially applied to the hour of contract discontinuation, often on a Friday at the close of trading. On triple witching, three different types of contracts expire simultaneously: heeled index options, single-stock options, and index futures. On triple witching days, single stock futures also cease.
When Does Triple Witching Occur?
Triple witching usually occurs on the third Friday of March, June, September, and December, at merchandise close (4:00 p.m. EST).
Why Do Traders Care About Triple Witching?
Because several derivatives expire at the same minute, traders will often seek to close out all of their open positions in advance of expiration. This can lead to increased exchange volume and intraday volatility. Traders with large short gamma positions are particularly exposed to price motions leading up to expiration. Arbitrageurs try to take advantage of such abnormal price action, but doing so can also be quite dodgy.
What Are Some Price Abnormalities Observed on Triple Witching?
Because traders will try to close or roll over and beyond their positions, trading volume is usually above average on triple witching, which can lead to greater volatility. Notwithstanding, one interesting phenomenon observed is that the price of a security may artificially tend toward a strike price with husky open interest as gamma hedging takes place.
This can lead the price to “pin” the strike at expiration due to this organize of trading activity. Pinning a strike imposes pin risk for options traders, wherein they become uncertain as to whether or not they should gymnastics their long options that have expired at the money or very close to it. This is because, at the same era, they are unsure as to how many of their similar short positions they will be assigned.