However, the average volume almost doubled to 4 million on the four triple witching trading days. Triple witching, typically, occurs on the third Friday of the last month in the quarter. In 2022, triple witching Friday are March 18, June 17, September 16, and December 16. Investors may also choose to rollover their derivative contracts, which means closing out this particular contract that is about to expire and entering into a similar contract that expires at a later date.
For example, futures contracts that are not closed require the seller to deliver the specified quantity of the underlying security or commodity to the contract buyer. Options that are in the money, that is, profitable, may mean the underlying asset is exercised and assigned to the contract owner. In both cases, if the contract owner or contract writer can pay for security to be delivered, the contract must be closed out before expiration. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date.
What is Triple Witching and How Does it Affect Trading in the Final Hour?
With single stock futures ceasing to trade, there are only three types of derivatives with concurrent expiry on four days of the year. On the expiration date, futures and options (if exercised), must be settled which means either the underlying asset needs to be delivered or the settlement is made using cash. Stock index futures and options are typically cash-settled, whereas you need to deliver the stock in case of single stock options. Derivative contracts, such as futures and options, derive their value from the price movements an underlying asset. Futures and options contracts are agreements to exchange underlying asset at a future date and price.
Triple Witching vs. Quadruple Witching
While single stock futures trade elsewhere internationally, they no longer trade in the United States. Triple witching, with its nuanced influences on markets, is nothing short of captivating. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt. They delve into strategies that capitalize on the price variances among correlated financial tools, thereby championing market equilibrium. Based on this research, we have developed trading strategies mentioned below, available to TradeMachine’s paid members. Our research in this field is still ongoing, and we expect to deliver more OpEx (day/week) related strategies in the near future.
Also, some traders might take up a straddle strategy, holding both a put and a call option with the same strike price and expiration date, to try to profit from large price swings in either direction. However, these strategies have risks and are not recommended for less experienced traders. These combined maneuvers swell the trading volume and can usher in marked market oscillations.
Can Triple Witching Impact Stocks Beyond Broad Market Volatility?
- Last Thursday marked the unofficial start of triple witching options expiration, with the rollover of June futures contracts into the September forward month at many brokers.
- The expected expiration date for the three might increase trading volume and cause unusual price changes in the underlying assets.
- Look for volatile, two-sided price action during this week’s triple witching options expiration, with the potential for major benchmarks to complete bearish reversal patterns.
- Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges.
- The intricate dance between triple witching and factors like options expiration and arbitrage dynamics adds layers to this financial event.
Hence, during the triple witching phase, the marketplace becomes a hotspot for those keen on leveraging this volatility. Many traders might venture into speculative arenas, acquiring options contracts in the hope of a market tilt favoring them, a move that could culminate in lucrative outcomes. Triple witching denotes a distinct market event when stock options, stock index futures, and stock index options expire concurrently. This simultaneous expiration intricately weaves together the trajectories of these three financial entities, 3 shareholder benefits to ibm’s spinoff sculpting the market’s pulse. 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 folklore, the “witching hour” actually happens in the dead of night, from 3–4 am.
The simultaneous expirations generally increases the trading volume of options, futures, and their underlying stocks, occasionally increasing the volatility of prices of related securities. The triple witching takeaway is that investors should be aware of what happens on these days and understand that there is a lot more volume in the markets. There could be some drastic price swings, but investors shouldn’t be carried away by any short-term emotions (which, really, is great advice any day in the markets). This is what generates the increased trading activity, and the large trades, especially from stock price quote and latest news offsetting trades, can cause temporary price distortions. Triple witching is often said to cause volatility in the underlying markets, and in the expiring contracts themselves, both during the prior week, and on the expiration day.
Parallelly, arbitrage scopes between stock index options and their component stocks beckon. Disparities between an index option’s valuation and the combined rates of its integral stocks can be capitalized upon by engaging with the undervalued facet and relinquishing the inflated one. Indeed, as our intuition suggested, after carefully studying the performance of different contracts during the quarterly expiration weeks, we were able to spot some interesting patterns that we can try to exploit. The reversal is nearing the confluence of the 50- and 200-day EMAs as well as round number support at $300 and the .618 Fibonacci retracement level, raising the odds for a string bounce. However, the on-balance volume (OBV) accumulation-distribution indicator failed to keep up with bullish price action during the three-month bounce, stalling at the .618 retracement.
The position management amplifies volume, specifically at the end of the trading session Friday afternoon. Triple witching and quadruple witching stand out as two key events in the financial realm. While both occasions revolve around the simultaneous expiration of diverse derivative contracts, the specifics of those contracts set them apart, influencing the market in distinct manners. At the same instant that the derivatives contracts expire, the anticipatory hedges that traders have placed become unnecessary, and so traders also seek to close these hedges, and the offsetting trades result in increased volume. These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets.
Triple witching day is often accompanied by increased volatility and trading volume because traders and institutional investors must close or roll their expiring futures and options positions to the next contract expiration. Call options expire in the money, that is, are profitable when the underlying security price is higher than the strike price in the contract. Put options are in the money when the stock or index is priced below the strike price. software outsourcing company with expertise in various industries In both situations, the expiration of in-the-money options causes automatic transactions between the buyers and sellers of the contracts.
Quadruple Witching
The CBOE S&P 500 Volatility Index (VIX) is sounding this message loud and clear, with the “fear gauge” lifting to a two-month high above $40. The intertwining of these three facets can weave a dense tapestry of trading actions that markedly influence the market. It’s essential for traders and investors to recognize the potential pitfalls and prospects during triple witching intervals. While the surge in trading volumes and unpredictability can open doors to gains, they also usher in the chance of abrupt and sizable downturns. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets.
A futures contract is also referred to as an “anticipated hedge” because it’s used to lock in prices on future buy or sell transactions. These hedges are a way to protect a portfolio from market setbacks without selling long-term holdings. Triple witching occurs on the last Friday of each trading quarter (i.e., March, June, September, and December). Concurrently, stock index futures, contractual obligations to transact a stock index on a forthcoming date, see their culmination during this period. Esteemed among institutional investors as hedging instruments, the twilight of these contracts is marked by a hive of adjustments, amplifying the market’s erratic heartbeat. The ripple effects of price shifts might prompt mutual funds and exchange-traded funds (ETFs) to readjust their stances, setting the stage for the market’s next act.
As the hour of triple witching draws near, key players like institutional investors and hedge funds recalibrate their hedging blueprints, seeking to shield their assets from potential market turbulence. This might involve orchestrating a mix of transactions across stock options, index futures, or other derivatives. To create a hedge against the probable ebbs and flows in the asset values they hold. Last Thursday marked the unofficial start of triple witching options expiration, with the rollover of June futures contracts into the September forward month at many brokers. The period from the rollover through this Friday’s expiration have a well-earned reputation for whipsaws and reversals, raising the potential for high volatility.