[Options ABC] Triple Witching Day: The Essential Survival Guide for Today's Options Trading

Hello everyone and welcome back to moomoo. I'm options explorer. In today's [Options ABC], we're diving into the concept of Triple-Witching Day.

There’s a myth surrounding Triple Witching Days - that they bring a 'curse' of plunging stock prices.

But does data support this notion? And how does it affect options trading?

Let's explore together today whether there's any reality to this belief and how it could potentially influence your options trading strategies.

Triple Witching Day happens on the third Friday of March, June, September, and December each year.

1. Stock index futures

2. Stock index options

3. Stock options.

On Triple Witching Day, retail investors and fund managers often rush to close or roll over their expiring positions.

This flurry of activity typically results in increased trading volume and can cause notable price volatility in the market throughout the week.

Because multiple financial derivatives expire on the same day, many investors will engage in buying and selling activities either before or on the expiration day to close or roll over their positions.

This concentrated flurry of trading typically leads to a significant increase in market trading volume.

For example, on December 16, 2022, the trading volume of the S&P 500 reached a six-month high.

With a surge in trading volume, market volatility also increases, which can lead to pricing anomalies.

During Triple Witching Day, trading volumes often peak in the last hour of the trading session, This happens because many traders choose to adjust or close their positions just before the market closes, leading to larger price swings towards the end of the trading day.

While this can present some arbitrage opportunities, it's crucial to be mindful of the risks involved.

As people become more familiar with the concept of Triple Witching Day, the phenomenon of market participants trying to get ahead of expectations often occurs.

On the eve of Triple Witching Day, the market typically has certain expectations about potential volatility.

These expectations can lead traders to act early, thereby influencing stock prices.

For example, if there's a general market expectation of a price movement in a particular direction, traders might act in advance, which in turn affects the actual trend of stock prices.

The chart below is the average of the high minus the low of the last 50 observations of options expiration day (black line), quadruple witching (blue line – the flat “top” is the observation), and any trading day (red line).

It should be noted that Triple Witching Day is perhaps somewhat more volatile than both options expiration day and a random day.

For comparison, the average overnight gain on any random day is about 0.05%. Therefore, the Triple Witching Day is generally bearish.

More specifically, Bloomberg's 1994-2023 statistics on the historical returns of Triple Witching Days in the U.S. market show that the performance varies across different months.

Notably, Triple Witching Days in March and December seem more inclined to yield positive returns, while those in June and September might face some challenges.

When Triple Witching Day rolls around, there's no need to get anxious or worry about some kind of 'curse'.

The best mindset is to keep calm and make rational decisions based on your usual strategies.

Here are some considerations when it comes to Triple Witching Day:

This refers to taking advantage of price fluctuations, especially during the witching hour, when prices can become particularly volatile.

This volatility may present options arbitrage opportunities. Investors may consider strategies like straddles or strangles when volatility increases.

However, this also means a potential disconnect between the implied volatility and historical volatility of options, providing opportunities based on volatility predictions.

However, these strategies require a solid understanding of options and practical experience, so they are not recommended for beginners.

During witching days, the value of options expiring on these days can be highly unstable and risky.

While volatility can present opportunities, trading expiring options during these times is akin to "picking up pennies in front of a bulldozer," implying high risk for uncertain rewards.

Therefore, it's advisable for beginners to avoid trading options expiring around witching days.

For example, if Alice holds a call option expiring on a witching day and is uncertain about the price direction, she could close out her current short-dated calls and purchase new ones with a later expiration on the same stock.

This allows her to keep upside exposure in case of a rally, while mitigating the volatility risk from that immediate expiration date.

Rolling over options usually requires manually closing your current trade, then opening a new one. This two-step process can create delays that lead to price changes working against you.

By closing the old position and opening the new one instantly, moomoo looks to minimize slippage risks and secure optimal pricing.

Head to the 'Accounts' section.

Find the option position you want to change and tap "Roll."

Pick the specific option you want to update and tap "Trade."