Along those same lines, stock index futures contracts will also expire on September 20. That means investors and traders holding these futures contracts need to make choices about rolling them, closing them or taking physical delivery of the underlying assets. Simultaneously, stock index options contracts, which are tied to broader market indices, will also expire on September 20, requiring holders to decide on whether to close these positions, or roll them to a future expiration. Single Stock Futures are the fourth type of derivative contract which can expire on triple witching day. This can cause the phenomenon to be called “quadruple witching,” although one term can replace the other.
However, you must also know how to avoid the great risks that arise during triple witching. Finally, consider watching the days before each triple witching, because traders often choose to shift their positions before unpredictable Friday. At its core, Triple Witching is the quarterly event when three different types of financial derivatives contracts—stock options, stock index futures, and stock index options—all expire on the same day. Tastylive forex trading psychology content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested.
In conclusion, triple witching is an event that occurs on the third Friday of March, June, September, and December, where stock options, stock index options, and stock index futures contracts expire simultaneously. The final hour of triple witching can be a time of heightened trading volume, increased volatility, and potential opportunities for profit through arbitrage. Traders and investors need to be aware of these dynamics and adjust their strategies accordingly to navigate the market effectively during this time. During triple witching events, three different types of financial derivatives contracts—stock options, stock index futures, and stock index options—all expire on the same day. This convergence of multiple expirations can lead to increased trading activity and volatility in the financial markets. When it comes to the world of finance, there are certain terms and events that hold a significant impact on the markets.
- This indicates that despite the possibility of bizarre price movements, the market can also react positively to this event.
- As one part of triple witching, traders are closing out or exercising their stock options.
- One tool investors can use to monitor volatility is the Cboe Volatility Index (VIX).
- Triple witching days often present arbitrage opportunities due to temporary mispricing in the market.
- The best brokers for options trading can help you get started with options as well as stocks.
Opportunities for Arbitrage
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Thus, while triple witching can unfurl enticing arbitrage openings, traders should embrace them judiciously, backed by astute strategies to adeptly sail the intricate market waters and optimize success probabilities. 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.
Many of those are still A.M.-settled, which still creates a noticeably larger opening auction, but still not as significant as the quarterly witching days (Chart how to calculate pivot points 2). These days, there are plenty of other derivatives that expire on different dates too. Given index rebalancing is at least as significant as derivatives expiries, many still refer to the date as “Quad Witch,” although the quad now refers to the impact of index trades on the close. In sum, the spectacle of triple witching necessitates an intricate dance of vigilance, adaptability, and foresight. While it unfolds its drama, those well-prepared can not only safeguard their positions but also potentially tap into the plethora of opportunities it unfurls.
As traders adjust or close their positions, there can be unusual movement in the stock’s price and volume. This is usually more pronounced in stocks with smaller market caps or those that trade heavily in the derivatives market. Caution is in order at this time since these price changes don’t often reflect shifts in the underlying company’s fundamentals. The third Friday of March, June, September, and December are called triple witching days because stock options, stock index futures, and stock index options all expire on the same day.
- This is what generates the increased trading activity, and the large trades, especially from offsetting trades, can cause temporary price distortions.
- This flurry, marked by an upsurge in trading volume, often catalyzes pronounced price oscillations and an unpredictable market demeanor.
- The fourth type of contract involved in quadruple witching, single-stock futures, hasn’t traded in the U.S. since 2020.
- Closing out a position before expiration eliminates the need to manage settlement procedures or margin adjustments.
Increased Volatility: A Double-Edged Sword
The next occurrences of this phenomenon for 2025 are scheduled for June 20, September 19, and December 19, giving more chances for a major market activity. The last instance of the triple witching event was in December 2024, when benchmark indices ended higher. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. The relatively low level could be a sign that investors are getting complacent, Pictet Asset Management chief strategist Luca Paolini warned on Thursday.
Other Strategies
Learn how triple witching affects the finance industry and influences trading during the final hour, with a detailed definition and its impact on fusion markets broker review financial markets. This phenomenon was earlier called as ‘Quadruple Witching’, with single-stock options also expiring on the same day. However, the single-stock options have not traded since 2020 and hence they have been renamed Triple Witching.
This convergence leads to a surge in trading activity as market participants adjust their portfolios. 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. SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. This is what generates the increased trading activity, and the large trades, especially from offsetting trades, can cause temporary price distortions. Single stock futures have an interesting backstory, which we’ll get to later on. On the third Friday of every month, multiple derivatives products expire, giving rise to greater than normal trading volumes.
Institutional investors, hedge funds, and market makers unwind or roll over large positions, often using algorithmic trading strategies. The influx of orders can lead to rapid shifts in liquidity, impacting bid-ask spreads and execution prices. Halloween comes just once a year, but Wall Street types don’t mind a good scare more often—in the form of a financial market phenomenon known as triple witching. It happens on a certain date every quarter, and even though everyone knows it’s coming, triple witching can shake up the markets.
Overall, total daily share volume is also typically 44% higher on “witching” days compared to a “normal” day. We also typically see a higher lit market share due to an increase in more volume trading on-exchange in the opening and closing crosses. 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. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to highvolatility.
Triple witching vs. quadruple witching
The unpredictable nature of these hours and the impact they could have on a trader’s positions warrants a level of caution. A solid options edcuation can be an invaluable resource when developing and executing your triple witching trading strategies. Our programs provide skill, strategies and trading systems to help you make informed decisions. Whether you’re exploring different strategies, analysing potential risks, or tracking market movements, OptionPundit has you covered.
During Triple Witching, three types of financial derivatives contracts—stock options, stock index futures, and stock index options—all reach their expiration on the same day. Traders and investors must therefore make decisions about their options and futures positions, which can lead to potential shifts (and opportunities) in the markets. Unlike shares of stock, futures and options contracts expire, meaning they have a fixed lifetime. That can all lead to a mad scramble, especially during the “witching hour,” the final trading hour (3 to 4 p.m. ET) of the triple witching day. Triple witching sounds like something from a horror movie, but it’s actually a financial term. Options and derivatives traders know this phenomenon well because it’s the day when three different types of contracts expire.
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Traders must also consider liquidity differences between contract months, as newer contracts may have wider bid-ask spreads or lower trading volume. Delta hedging adjustments by options market makers also contribute to price swings. Since options prices are influenced by the underlying stock’s movement, market makers hedge their exposure by buying or selling shares. As expiration nears, these hedging requirements shift, particularly for contracts close to finishing in or out of the money.