Triple witching, marked by the synchronized expiration of stock options, stock index futures, and stock index options, unravels a tableau of arbitrage prospects for discerning traders. Arbitrage, the art of leveraging price disparities across varied markets or instruments, demands an astute market acumen. Because multiple derivatives (futures and options) are connected to a similar underlying asset class, volume spikes and the above-average trading volume can create unpredictable price action. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date.
The increased trading volume and volatility can cause prices to fluctuate a lot more than usual. Traders and investors who are not prepared for this increased volatility can be caught off guard and suffer losses, so it pays to know when it is and have a plan of what you want to do. On Triple Witching, traders and investors who hold these financial products are faced with a decision. They can either close out their positions or roll them over into the next expiration cycle.
December 2008’s triple witching is etched in market memory after the Dow fell 680 points and a recession was declared. Amidst the cataclysmic financial meltdown, an already turbulent market landscape was further shaken by the expiring contracts. Specifically, on December 19, 2008, the Dow Jones Industrial Average rode a rollercoaster, gyrating over 200 points throughout the day, only to culminate 65 points above its opening position. This fervent activity underpinned the how to trade bill williams fractals compounded volatility injected by triple witching into an already fragile market milieu.
Are There Strategies Traders Can Use For Triple-Witching Dates?
Friday was triple witching day, meaning that stock options, stock index options and stock futures contracts were all due to expire. This happens four times a year and can lead to increased volume, as money is moved around resulting in sometimes unusual (or spooky) price action. Triple witching refers to the concurrent expiration of stock options, stock index futures, and stock index options. Such coinciding expirations can amplify trading volumes and market fluctuations.
What happens to stocks on triple witching day?
- A break of their key support levels would make them questionable and give us reasons (as in Monty Python) to weigh them against a duck.
- On the expiration date, contract owners can decide not to take delivery and instead close their contracts by booking an offsetting trade at the prevailing price, settling the gain or loss from the purchase and sale prices.
- Past instances underscore the gravity of triple witching, revealing its capacity to set off chain reactions in the market.
On these days, we see the expiration of stock index futures, stock index options, and stock options. As these contracts come to a close, traders and investors might decide to close out, renew, or exercise their positions. Triple witching day occurs four times in a year when the expiration date of three types of derivatives coincides. Triple witching hour, typically, is referred to the last hour of trade on that day.
The witching hour is the final hour of trading before the expiration of derivatives contracts. More often, traders will use terms such as “triple witching,” which is the expiration of stock options, index options, and index futures on the same day. This event occurs on the third Friday of March, June, September, and December. Triple witching does not include all of the stock index futures and options contracts, so even though they are the most talked-about expiration events, they are not the only expiration days.
Triple Witching Explained: A Comprehensive Guide for Traders
The position management amplifies volume, specifically at the end of the trading session Friday afternoon. To avoid this, the contract owner closes the contract by selling it before the expiration. After closing the expiring contract, exposure to the S&P 500 index can be continued by buying a new contract in a forward month.
As market practitioners, we are not just interested in anomalies themselves but in ways we can exploit them to make money. In https://forexanalytics.info/ 2023, Triple Witching occurs March 17, June 16, September 15, and December 15.
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. 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.
A futures contract, an agreement to buy or sell an underlying security at a set price on a specified day, mandates that the transaction take place after the expiration of the contract. 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. This bearish divergence may signal that buying interest has dried up, raising the odds for additional downside. How an individual day trader chooses to handle triple witching will depend on their trading style, trading strategies, and level of trading experience. New traders will want to be more cautious in the days leading up to and on Triple Witching Friday.
Our research in this field is still ongoing, and we expect to deliver more OpEx (day/week) related strategies in the near future. 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. Lastly, the very aura of an impending triple witching can recalibrate trader behaviors. Some might opt for the sidelines, preferring to bypass the whirlwind of volatility, while others might dive headlong, lured by the prospects spawned by these market undulations. Concurrently, the guardians of market liquidity—market makers and arbitrageurs—make their presence felt.
Any references to quadruple witching are about the three types of contracts above expiring simultaneously. If a day trader opts to trade during these weeks, measures should be taken to ensure the strategy being used works in such an environment, or a new strategy can be constructed specifically for this week. Swing traders and investors are unlikely to be significantly affected by the event, but swing traders may wish to take note of any statistical biases present during the week of triple witching. Triple witching is the third Friday of March, June, September, and December. Although the name sounds ominous, triple witching day has nothing to do with Halloween or scary stories. Triple witching is simply the term given to four unique trading days each year.
