The intricate dance between triple witching and factors like options expiration and arbitrage dynamics adds layers to this financial event. Past instances underscore the gravity of triple witching, revealing its capacity to set off chain reactions in the market. Given its impact, a vigilant stance, backed by a robust understanding and a clear game plan, becomes essential for those diving into this tumultuous trading tide. While both triple and quadruple witching can unveil arbitrage chances stemming from price variances between futures, options, and the stocks themselves, quadruple witching’s extra contract can magnify these pricing gaps. This potentially offers sharp-eyed traders a bigger playground to leverage these differences. Writers and holders of futures and options contracts must exit their positions to avoid stock assignment if their position is in-the-money.
Options that are in the money are similar for those holding expiring contracts. For example, the seller of a covered call option can have the underlying shares called away if the share price closes above the strike price of the expiring option. As our intuition suggested, periods of high-volume trading impact liquidity.
Triple witching is simply the term given to four unique trading days each year. Despite the overall increase in trading volume, triple-witching days do not necessarily lead to high volatility. Traders ought to brace for potential volatility spikes and be on guard for unexpected market shifts.
I am continually working on developing new trading strategies and improving my existing strategies. I have developed a series of Excel backtest models, and you can learn more about them on this site. Tradinformed backtest models are an easy-to-use format that allows you to backtest your trading strategies https://www.dowjonesrisk.com/ using past market data and technical indicators. I like that this strategy has a high Profit Factor which tells us that winning trades tend to be larger than losing trades. I do all my analysis in Excel and you can see the results of each trading strategy compared to the underlying instrument.
Are There Strategies Traders Can Use For Triple-Witching Dates?
He founded the website in 2013, showing traders how to calculate technical indicators. Since then, Tradinformed has developed a range of easy-to-use Excel backtesting tools to help traders take control of their trading and achieve success. This will help you learn how to backtest trading strategies and make informed trading decisions while providing you with the tools you need to develop your own trading systems.
The event can lead to higher volatility and more trading volumes, giving speculators an opportunity for quick arbitrage opportunities. It happens four times a year – on the third Friday of March, June, September and December – with much of the increases in activity taking place during the last hour of trading, otherwise known as the “witching hour.” Triple witching is the synchronized expiration of stock index futures, stock index options, and stock options on the third Friday of March, June, September, and December. It’s pivotal for traders because the convergence of these expirations can heighten market volatility, amplify trading volumes, and present arbitrage opportunities. Triple witching is all about the third Friday of March, June, September, and December.
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. 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 they interact can lead to increased market activity and higher trading volumes.
What happens to stocks on triple witching day?
Investors may also choose to exercise their contracts or accept assignment. Triple witching is the quarterly event when the calendar aligns for all the prominent futures and options contracts to expire on the same day. Investors should understand what happens on triple witching days and be prepared for the greater volume and price volatility that comes with these days. Knowing that can go a long way toward preventing emotional responses to market movements.
In September 2020, the market where single stock futures were traded, OneChicago, closed and single stock futures ceased trading. 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. 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. Nonetheless, the ephemeral nature of arbitrage windows, coupled with the necessity for adept trading mechanisms and meticulous strategies, can’t be overlooked. Imposed costs, like transactional outlays and cost of bid-ask spreads, might dilute profit margins.
- It happens four times a year – on the third Friday of March, June, September and December – with much of the increases in activity taking place during the last hour of trading, otherwise known as the “witching hour.”
- The position management amplifies volume, specifically at the end of the trading session Friday afternoon.
- It’s pivotal for traders because the convergence of these expirations can heighten market volatility, amplify trading volumes, and present arbitrage opportunities.
- The phenomenon of triple witching has left an indelible mark on financial markets time and again.
- This fervent activity underpinned the compounded volatility injected by triple witching into an already fragile market milieu.
When it comes to futures contracts, they represent agreements to buy or sell an underlying asset at a predetermined price on a specified future date. This often involves “rolling out” the contract, which means closing the current position and opening a new one for a future date. The actions surrounding futures and options contracts are especially pronounced on triple witching days, as traders aim to manage their exposure and avoid unwanted outcomes. It’s triple witching day, which refers to the simultaneous expiration of stock options, market index options and market index futures.
Strategy: Seasonal Short Trade in AAPL
When multiple derivative contracts converge towards their expiration, it’s akin to pouring gasoline on the volatility fire. For market players, being attuned to these periodic tempests and recalibrating strategies in anticipation can be instrumental in adeptly steering through the tempestuous waters of triple witching intervals. 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 compounded volatility injected by triple witching into an already fragile market milieu.
Meanwhile, traders clutching onto these ticking contracts grapple with a pivotal decision. They can either conclude their current positions by purchasing or offloading the core asset, neutralizing the initial contract, or transition to a forthcoming expiration cycle. In the latter scenario, they would initiate a fresh contract set for a later expiration, ensuring they maintain their market presence. However, carelessly choosing an expiration date is one of the most common mistakes when trading options, often leading traders astray.
Key Considerations During Triple Witching
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.
Triple Witching vs. Quadruple Witching
Triple Witching has historically given provides some excellent short trading opportunities. During the last 11 years of (mostly) bull market, the days around triple witching have tended to fall. Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading. An arbitrageur is a trader who seeks price inefficiencies in a security and then buys and sells the security simultaneously to make a risk-free profit.
You can compare the net profit, compound annual growth rate (CAGR), max drawdown and MAR ratio. You will see that avoiding triple witching has improved performance compared to buy and hold. It’s worth noting that the pandemic did not help the market volatility either, so this tremendous fall in value is attributed to that as well.
In this situation, the option seller can close the position before expiration to continue holding the shares or let the option expire and have the shares called away. For example, one E-mini S&P 500 futures contract is valued at 50 times the value of the index. If the S&P 500 is at 4,000 at expiration, the value of the contract is $200,000, the amount the contract’s owner must pay if the contract expires. In sum, the spectacle of triple witching necessitates an intricate dance of vigilance, adaptability, and foresight.
