Triple Witching

What Is Triple Witching Day?

Triple witching seems like something from a thriller, however it's actually a financial term. Options and derivatives traders realize this phenomenon well since it's the day when three distinct types of contracts lapse. It happens just once a quarter and can cause wild swings in volatility, as large institutional traders roll over futures contracts to free up cash. Doing so makes a ton of increased volume — sometimes half higher than average, particularly in the last trading hour of the day — however individual investors shouldn't need to feel frightened. In fact, some could even view this volatility as a profit-production opportunity.

Which 3 Types of Derivative Contracts Expire on Triple Witching Day?

1. Stock Options: These are contracts taken out on the heading of a stock price sometime not too far off. Not at all like stocks, they're not an investment in a company; rather, they're the right to buy or sell shares of a company at a later time span. Calls let you buy stock shares at a set price, known as the strike price, prior to the expiration date. Puts give you the right to sell shares.
2. Index Options: These are futures contracts on a [stock index](/marketindex, for example, the S&P 500. These options are settled in cash.
3. Index Futures: These are futures contracts on equity indexes. These contracts are additionally settled in cash.

A futures contract is likewise alluded to as an "expected support" since securing in prices on future buy or sell transactions is utilized. These supports are a method for shielding a portfolio from market setbacks without selling long-term holdings.
It's worth taking note of that a couple of times a year, single stock futures likewise terminate on witching day, adding a fourth asset to the trading cauldron, and that is the reason a few investors allude to this date as "quadruple witching," albeit the terms are compatible. single stock futures have an interesting origin story, which we'll get to later on.

When Is Triple Witching? Triple Witching Calendar 2022

In modern trading, triple witching occurs on the third Friday of March, June, September, and December (the last month of each quarter).

Impending Triple Witching Dates

• Friday, June 17, 2022
• Friday, September 16, 2022
• Friday, December 16, 2022
• Friday, March 17, 2023
• Friday, June 26, 2023

What Is the Witching Hour?

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 fables, the "witching hour" actually occurs in the dead of night, from 3-4 am. It was known as when spirits arrived at the level of their powers. During the Middle Ages, the Catholic Church even banned individuals from wandering outside during this time, so as not to get found out in the chaos.
Today, such thoughts aren't treated anything else in a serious way than simple notion, yet triple witching can cause chaos among investors, in the event that they are not aware of what's going on.

What Happens During Triple Witching?

As you would envision, a great deal of trading activity occurs in the market when stock options, index options, and index futures contracts all terminate. We're talking a lot of money here: during Triple Witching in September 2021, for instance, around $3.4 trillion of equity options expired.
Anyway, what exactly is happening? Would it be a good idea for them to keep their supports on? Would it be advisable for them to conjecture? Would it be advisable for them to roll, or close out, their contracts, and assuming this is the case, by how much? This generates the increased trading activity, and the large trades, particularly from offsetting trades, can cause transitory price bends.
At the very instant that the derivatives contracts lapse, the anticipatory supports that traders have placed become superfluous, thus traders likewise look to close these fences, and the offsetting trades bring about increased volume. These large volume increases can thus cause price swing (i.e., volatility) in the underlying assets.

How Does Triple Witching Affect the Stock Market?

Triple witching itself doesn't move the stock market; it just makes increased volume. Similarly, the expiration of the options and futures contracts don't be guaranteed to bring about volatility — that is brought about by the actions that traders take in light of the transitory price changes of their underlying assets which can be moved due to the increased volume.
At the point when this occurs, arbitrageurs try to make use, frequently making trades that are completed in only seconds. A arbitrageur is a trader who searches for price failures in a security and afterward looks to create a gain by buying and selling it simultaneously. This practice implies a lot of risk.

Is Triple Witching Bullish or Bearish?

Generally talking, triple witching isn't an all of the time "up" day, and it's not an all the time "down" day for the markets. It doesn't connote a trend. Ordinarily, it neither moves the market fundamentally higher nor lower; it essentially adds an impermanent increase in volume and liquidity.
Notwithstanding, it's important to note that market volumes likewise will quite often be higher on index rebalancing day as well as during and after more extensive macroeconomic news events, thus, when taken in tandem with triple witching, these events can cause big moves in the market.

Instances of Triple Witching Volatility in Light of News Events

On June 18, 2021, a record number — $818 billion — of stock options expired, which prompted almost $3 trillion in "open interest," or open contracts. On this day, the Federal Reserve likewise announced that it could bring interest rates up in 2023 due to inflationary pressures. These news events brought about increased volatility, and the S&P 500 lost 1.3% while the Dow Jones Industrial Average dropped 1.6%.
On September 17, 2021, multi week ahead of the Federal Reserve's meeting, market volatility was developing in light of mounting worries about the COVID-19 Delta variation impacting the economy as well as the Federal Reserve's announcement that it would start to unwind its monetary stimulus. These news events, brought with the S&P 500's quarterly index rebalancing, which additionally happened that day, made the S&P 500 lose 1%.

Is There Such a Thing as Quadruple Witching?

Single Stock Futures are the fourth type of derivative contract which can lapse on triple witching day. This can make the phenomenon be called "quadruple witching," albeit one term can replace the other. Single stock futures are futures contracts placed on individual stocks, with one contract controlling 100 shares being ordinary. They are a hedging device that was recently banned from trading in the United States. The Commodity Futures Modernization Act lifted the ban in 2000, and single stock futures were traded on the OneChicago Exchange from November, 2002 until September, 2020, albeit right now they are just accessible on overseas financial markets.

How Did Triple Witching Affect 1987's "Dark Monday?"

On October 19, 1987, the Dow Jones Industrial Average lost 22.6% in a single trading session. The day became known as "Dark Monday," however triple witching events, which occurred the Friday before, on October 16, 1987, had caused the selloff of options and futures contracts to quickly speed up, bringing about stocks failing in pre-day trading. The gigantic sell orders were left unrestrained by any sorts of systematic stop gaps, thus financial markets annoyed all around the world over the course of the day. This stock market crash was the greatest one-day decline to happen since the Great Depression in 1929.
Taking examples from the event, regulators moved the options expiration from the morning to the evening and put "circuit breakers" into place that would let the exchanges briefly halt trading in the event of one more enormous sell off.

How Might Investors Prepare for Triple Witching Days?

The triple witching important point is that investors ought to know about what occurs on nowadays and comprehend that there is significantly more volume in the markets. There could be some exceptional price swings, however investors ought not be carried away by any short-term feelings (which, truly, is great counsel any day in the markets).

Features

• Triple witching days, especially in the last hour of trading going before the closing bell — called the triple witching hour — can see increased trading activity as traders close, roll out, or offset their lapsing positions.
• Triple witching happens quarterly — on the third Friday of March, June, September, and December.
• Triple witching is the simultaneous expiration of stock options, stock index futures, and stock index options contracts generally around the same time.

FAQ

What Is Witching and Why Is It Triple?

In fables, the witching hour is a powerful season of day when detestable things might be brewing. In derivatives trading, this has conversationally applied to the hour of contract expiration, frequently on a Friday at the close of trading. On triple witching, three distinct types of contracts lapse simultaneously: listed index options, single-stock options, and index futures. On triple witching days, single stock futures additionally lapse.

When Does Triple Witching Occur?

Triple witching for the most part happens on the third Friday of March, June, September, and December, at market close (4:00 p.m. EST).

For what reason Do Traders Care About Triple Witching?

Since several derivatives terminate at similar moment, traders will frequently look to close out each of their open situations in advance of expiration. This can lead to increased trading volume and intraday volatility. Traders with large short gamma positions are especially presented to price developments leading up to expiration. Arbitrageurs try to exploit such abnormal price action, yet doing so can likewise be very risky.

What Are Some Price Abnormalities Observed on Triple Witching?

Since traders will try to close or roll over their positions, trading volume is generally better than expected on triple witching, which can lead to greater volatility. In any case, one interesting phenomenon noticed is that the price of a security may falsely incline toward a strike price with large open interest as gamma hedging takes place.This can lead the price to "pin" the strike at expiration due to this kind of trading activity. Pinning a strike forces pin risk for options traders, wherein they become dubious with regards to whether they ought to exercise their long options that have expired in the money or extremely close to it. This is on the grounds that, simultaneously, they are uncertain concerning the number of their comparable short positions they will be assigned.