Expect a Wild Ride During Triple Witching Week

It also isn’t wise to assume that bears can follow through with additional downside, given high levels of optimism generated by pandemic reopenings around the globe. However, traders and investors need to watch rising infection rates in many states, even if local governments deny that health facilities can’t handle the surge. As we all know, the same politicians got caught flat-footed in February, denying the impact of the virus until hospital beds filled up. In modern trading, triple witching happens on the third Friday of March, June, September, and December (the last month of each quarter). 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.

Triple Witching Impact on the Market

However, the average volume almost doubled to 4 million on the four triple witching trading days. These opportunities might be catalysts for heavy volume going into the close on triple-witching days as traders look to profit on small price imbalances with large round-trip trades completed in seconds. 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. 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. Like triple witching, quadruple witching is the ending of contracts on the third Friday of every March, June, September, and December.

Understanding XRP’s Role in the Future of Money Transfers

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. Single stock futures are futures contracts placed on individual stocks, with one contract controlling 100 shares being typical.

  1. One such event is triple witching, which refers to the simultaneous expiration of three different types of financial instruments on the same day.
  2. Triple witching day is consistently one of the most heavily traded days each year.
  3. Derivative contracts, such as futures and options, derive their value from the price movements an underlying asset.
  4. Liquidity generated by large trade volume during triple witching makes a good time for indexes to rebalance.
  5. Triple witching, encompassing the convergence of stock index futures, stock index options, and stock options, emerges as a standout event in the financial markets.

Offsetting Futures Positions

It’s at this intersection that stock options, stock index futures, and stock index options draw the curtains, inducing a choreographed interplay amidst them and the broader markets. 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, 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.

Witching Hour: What it Means, How it Works

These large volume increases can in turn cause price swing (i.e., volatility) in the underlying assets. 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. As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date. 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. One strategy is to look for arbitrage opportunities from price discrepancies between the stock market and derivative markets.

Why Does Trading Volume Tend to Spike During the Witching Hour?

During the Middle Ages, the Catholic Church even banned people from venturing outside during this time, so as not to get caught in the chaos. These combined maneuvers swell the trading volume and can usher in marked market oscillations. 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. The intertwining of these three facets can weave a dense tapestry of trading actions that markedly influence the market.

The increased volume tends to lead to higher volatility and intraday price swings and stocks can be unpredictable on Triple Witching day. Investors, particularly large financial institutions, often offset the new positions by buying or selling the underlying asset as a hedge, which further fuels the increased volume and volatility. The fourth type of contract involved in quadruple witching, single-stock futures, hasn’t traded in the U.S. since 2020. Any references to quadruple witching are about the three types of contracts above expiring simultaneously. Trading volume leading up to this third Friday of the month had increased market activity. Trading volume March 15, 2019, on U.S. market exchanges was 10.8 billion shares, compared with an average of 7.5 billion average the previous 20 trading days.

This stock market crash was the greatest one-day decline to occur since the Great Depression in 1929. 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. Traders and investors often realign their positions and secure their portfolios during this time. 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. Stock futures can often jump or fall between 0.5% to 1% (or more) within seconds, as these contracts expire or are about to expire.

Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets. Triple-witching days generate more trading activity and volatility since contracts allowed to expire cause buying or selling of the underlying security. Triple Witching occurs on the third Friday of March, June, September, and December, when three types of derivative contracts—index options, index futures and single stock options— expire simultaneously. As options and futures contracts expire, investors must close or offset their position or roll out existing positions to a future expiration date. The position management amplifies volume, specifically at the end of the trading session Friday afternoon.

As a result, there is typically a surge in trading volume and increased volatility in the market. Every third Friday of March, June, September, and December, three financial instruments—stock index futures, stock index options, and stock options—expire at the same time. The way bitmex review they interact can lead to increased market activity and higher trading volumes. 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.

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 compounded volatility injected by triple witching into an already fragile market milieu. Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money. Triple witching is the quarterly event when the calendar aligns for all the prominent futures and options contracts to expire on the same day.

Index providers periodically tweak the constituents and weights accorded to those constituents in the index based on their methodology. However, in 2020, OneChicago, the exchange where single stock futures were traded shut down. While single stock futures trade elsewhere internationally, they no longer https://www.broker-review.org/ trade in the United States. 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.

Besides the increased trading, the witching hour can also result in price inefficiencies and, hence, arbitrage opportunities. Because of the heavy volume of trades coming in quickly, traders seek to profit from even slight price imbalances. SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. Quadruple witching happens when three related classes of options and futures contracts expire, along with the individual stock futures options. On June 18, 2021, a record number—$818 billion—of stock options expired, which led to nearly $3 trillion in “open interest,” or open contracts. On this day, the Federal Reserve also announced that it might raise interest rates in 2023 due to inflationary pressures.

However, some contracts for all three time periods can expire at the beginning of a trading day as well. Triple Witching is a significant event in the world of finance, and it can have a substantial impact on the stock market. In this article, we explore what Triple Witching is, how it works, and its potential impact on the stock market.

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