Triple Witching: What it is and How it Affects Options Trading
Have you ever heard of "triple witching" or "witching week" in the stock market? It's one of those buzzwords that gets traders buzzing four times a year.
Picture this: on the third Friday of March, June, September, and December, three types of financial contracts all expire at once, which often leads to a flurry of trading activity and wild price swings, making it a thrilling (or, sometimes, nerve-wracking) day for investors!
Understanding triple witching is essential for market participants as it presents both opportunities for potential profit and heightened risks that require careful management. Read on to learn more.
What is triple witching?
In financial markets, "triple witching" describes an event that takes place on the third Friday of certain months, typically March, June, September, and December.
On this day, three kinds of financial derivatives — stock options, stock index futures, and stock index options — reach their expiration simultaneously, leading to increased trading activity and market volatility.
The spike in market movement on triple witching days, usually felt most at the final trading hour preceding the closing bell (4 PM Eastern Time) can offer potential opportunities for savvy investors and traders, but the elevated volatility also carries additional risks. This is why traders should be mindful of triple witching events and plan their portfolios carefully to account for potential significant market shifts.
How triple witching works
Triple witching is when three types of financial derivatives all expire at the same time — stock options, stock index futures, and stock index options. This can lead to a spike in trading and market volatility.
Here's what happens during triple witching:
Stock options: Regular monthly options tied to individual stocks or ETFs expire. Traders and investors need to decide whether to exercise these options, roll them over, or just let them expire.
Stock index options: Just like stock options, options tied to broader market indices like the S&P 500 also expire during triple witching. Those who hold these options have to make choices about closing their positions or rolling them over.
Stock index futures: Futures contracts based on big market indices like the S&P 500 or Nasdaq also hit their expiration date during triple witching. People who use these contracts for hedging or speculation have to either close or roll them over before the event.
Triple witching example
An example of triple witching can be seen on a typical third Friday in one of the designated months, such as June 21, 2024. On that day, stock options, stock index options, and stock index futures contracts are all set to expire. In this example, traders who hold options on individual companies such as Apple or Tesla may need to decide whether to exercise, close, or roll over their positions.
Futures contracts linked to popular indices such as the Nasdaq or Dow Jones will also face expiration on this same day. Investors and traders holding these futures contracts must make decisions regarding whether to roll them over, close them out, or manage their positions otherwise. Likewise, investors with positions in stock index options like the S&P 500 index may need to strategize before the contracts expire. It's important to note that index options are cash-settled, so there's no physical delivery of underlying assets involved in this example.
Traders and investors in these markets often adjust their portfolios around triple witching to account for the increased volatility and trading activity that can occur due to the simultaneous expiration of these different types of contracts.
Overall, this synchronization of contract expirations can lead to a flurry of trading activity and market swings as traders and investors adjust their positions or close them out.
Triple witching dates
2024
March 15
June 21
Sept. 20
Dec. 20
2025
March 21
June 20
Sept. 19
Dec. 19
2026
March 20
June 19
Sept. 18
Dec. 18
Expiration of options on triple witching
During triple witching, equity options expire alongside index options and futures contracts, causing significant market volatility as traders adjust positions. On the buy side, traders with in-the-money calls may exercise them or roll over positions to extend exposure. The term, "rolling over" means extending the duration of a financial instrument, like a futures contract or option, by closing the current position and opening a new one with a later expiration date. This allows investors to maintain exposure to the underlying asset for a longer period.
Traders might also close out-of-the-money positions or seek arbitrage opportunities. Arbitrage opportunities refer to situations where traders can potentially make profits by simultaneously buying and selling the same asset or related assets in different markets aiming to take advantage of price discrepancies.
On the sell side, traders may manage risk by hedging positions, closing in-the-money options, or balancing supply and demand by adjusting the quantity of securities available for sale and the desire of investors to buy those securities to ensure that prices remain stable and reflective of market conditions. Market makers may adjust their portfolios, affecting bid-ask spreads. Triple witching can lead to increased trading volume and price swings in individual stocks, requiring careful navigation.
Expiration of futures on triple witching
A futures contract is an agreement to buy or sell an asset at a set price on a future date. For instance, an E-mini Nasdaq-100 futures contract has a multiplier of $2 per point of the index. If the Nasdaq-100 index is at 12,000 at expiration, the contract would be valued at $24,000 (12,000 times $2), which the owner must pay if the contract expires.
To avoid this, the owner can sell the contract before it expires. On triple witching days, traders often close or adjust their positions, with some buying new contracts to maintain exposure to the Nasdaq-100 index. This process is called "rolling out" the contract. On expiration day, traders can close contracts by making an offsetting trade or extend them by rolling them forward.
Triple witching strategies
Triple witching may present various opportunities for profit potential across different trading strategies. Here are some approaches utilized during triple witching:
Momentum trading: Day traders seek stocks or indices with strong upward or downward momentum, aiming to capitalize on short-term gains by riding the trend.
Scalping: scalpers try to take advantage of minor price fluctuations by making numerous trades throughout the day, and can benefit from the potential for significant moves during triple witching.
Pairs trading: Traders may buy one asset and simultaneously short-sell a related asset when they detect a mispricing in the pair, with heightened volatility offering more pairs trading opportunities.
Gap trading: Traders focus on discrepancies between the previous day's closing price and the opening price on triple witching days, which can lead to sizable gaps and possible trading opportunities.
Reversal trading: The increased volatility may push securities into perceived overbought or oversold territory, setting up reversal opportunities that traders closely monitor during triple witching.
News trading: Due to the potential for higher-magnitude price shifts, traders often pay closer attention to news on triple witching days to be ready for possible opportunities arising from new developments.
Triple witching vs. quadruple witching
Up until 2020, the terms 'triple witching' and 'quadruple witching' would both be used to describe the third Friday of March, June, September, and December. As its name infers, quadruple witching involves the three types of contracts involved in triple witching (stock options, stock index options, stock index futures) plus one other: single-stock futures.
Single-stock futures haven't traded in the United States since 2020. This occurred because OneChicago, the only U.S. exchange offering single stock futures at the time, decided to close its market. The exchange cited low trading volumes and a lack of interest in the products as primary reasons for the closure. Single stock futures had struggled to gain popularity in the U.S. since their introduction in 2002 due to factors such as limited market demand, competition with other financial products like options, and regulatory hurdles.
FAQ about triple witching date
Why do they call it triple witching?
The phrase "triple witching" evokes the idea of three "witches" (the three contract types) converging, resulting in increased trading activity and market volatility as traders adjust positions. It's a colorful way to describe this quarterly financial event.
Is triple witching bullish or bearish?
Triple witching is neither inherently bullish nor bearish. Rather, it can lead to increased market volatility due to the simultaneous expiration of stock index futures, stock index options, and stock options.
Traders may reposition their portfolios and adjust hedges, causing potential price fluctuations in individual stocks and indices. Whether the market moves up or down depends on broader economic factors and investor sentiment.
Do stocks fall on triple witching day?
Stocks do not consistently fall on witching days. While triple witching can lead to increased market volatility due to the simultaneous expiration of stock index futures, stock index options, and stock options, this does not necessarily result in a downward movement in stock prices.
Market direction on witching days can vary depending on broader economic factors, investor sentiment, and how traders adjust their positions. While some stocks or sectors might experience price fluctuations, there is no consistent pattern of stocks falling on witching days.
Could triple witching affect stocks apart from general market volatility?
Yes, triple witching can impact individual stocks apart from general market volatility.
As options and futures contracts expire, traders adjust positions in specific stocks, causing buying or selling pressure and price fluctuations. Trading volume can surge, amplifying these movements. Temporary price discrepancies may arise between different markets or instruments due to contract settlement. Market-makers and traders adjusting their positions can affect supply and demand, leading to changes in stock prices. Specific stocks can experience heightened volatility based on open interest in their options or futures and the level of trading activity around them.
