Beware the Triple Witch

Friday is triple witching, the simultaneous expiration of options on stocks, futures on stock indexes and options on stock indexes. This event only occurs four times a year and it often causes volatility in markets.

An estimate $4 trillion notional options are set to expire on Friday, according to Goldman Sachs. When these options disappear from the books of investors and dealers they often need to square their positions, something often could leads to wild intraday swings in markets.

Triple witching sees some of the highest volume of any trading day during the year. The increased liquidity makes it the perfect opportunity for investors who want to put on or take off large positions before the end of the year. After Friday, volume tend to dry up into the holiday season.

Additionally, major indexes such as the S&P 500 will adjust their weightings to account for shifts in market capitalization at the close on Friday. This often leads to major swings in individual stocks as well as the overall market in the last half hour of trading as traders get ahead of these changes.