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Triple Witching Explained: Navigating Market Volatility in 2023

Traders and investors, in a flurry, realign or dissolve their positions in the wake of expiring contracts. This flurry, marked by an upsurge in trading volume, often catalyzes pronounced price oscillations and an unpredictable market demeanor. Triple witching refers to the third Friday of March, June, September, and December when three kinds of securities—stock market index futures, stock market index axi forex broker options, and stock options—expire on the same day. Derivatives traders pay close attention on these dates, given the potential for increased volume and volatility in the markets. Triple witching can influence individual stocks such as those with large options or futures contracts set to expire. As traders adjust or close their positions, there can be unusual movement in the stock’s price and volume.

  1. As options and futures contracts expire, traders must close or roll out their existing positions to a future expiration date.
  2. Once the expiry date arrives, any contract holders will need to buy or sell the underlying asset in question.
  3. For a market maker, at the instant that the derivatives expire, their hedge is no longer needed.
  4. 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.

For example, we know from previous work that market volumes tend to be higher on index rebalance dates or when broader macroeconomic events cause an increase in trading. Triple Witching, or the expiration of multiple derivatives products simultaneously, is another key event that causes volumes to be higher than average. Single stock futures have an interesting backstory, which we’ll get to later on. 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.

However, in 2020, OneChicago, the exchange where single stock futures were traded shut down. While single stock futures trade elsewhere internationally, they no longer trade in the United States. Concurrently, stock index futures, contractual obligations to transact a stock index on a forthcoming date, see their culmination during this period.

This has the benefit of enabling traders to speculate on what the price of the underlying market will be over a specific period. Once the expiry date arrives, any contract holders will need to buy or sell the underlying asset in question. Triple Witching occurs because the expiration dates for stock options, stock index futures, and stock index options all fall on the same day. Stock options give the holder the right to buy or sell a stock at a specific price on or before the expiration date. Stock index futures allow traders to bet on the future direction of a stock index.

Liquidity generated by large trade volume during triple witching makes a good time for indexes to rebalance. Any changes in the indexes leads to portfolio adjustments by index-based securities such as index funds. Triple witching occurs when three types have expiry dates scheduled for the same day.

Stock Index Futures

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. Triple witching underscores the intricate dance of key financial instruments, spotlighting both its benefits and challenges. As traders navigate this event, understanding its potential for increased liquidity and market efficiency, as well as its inherent volatility and complexity, becomes crucial.

What Are Some Price Abnormalities Seen on Triple-Witching Dates?

If you’re an investor or a trader, you have probably heard the term “Triple Witching” before. This term is used in the stock market to describe the expiration of three different financial instruments on the same day. The term “triple witching” refers to the extra volatility resulting from the expiration dates of the three financing instruments, and is based on the witching hour denoting the active time for witches.

What Is Triple Witching?

SPX’s daily range expanded nearly 7% on triple witching days, and the average percentage return was -0.72% lower than the daily average. Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Spot Gold and Silver contracts are not subject to regulation under the U.S. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to or GAIN Capital refer to StoneX Group Inc. and its subsidiaries.

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. Triple Witching tends to have above-average market volume and volatility – in particular during the last hour of Friday trading. 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. However, in both cases, market makers need to “un-hedge.” In the case of physically delivered options, unexercised options hedges need to be closed.

Northern Trust Asset Servicing Joins Data Race

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. 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. 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.

Chart 1: Auction volumes are elevated on expiration dates

Long-only traders and active investors can avoid triple witching by going to cash in all or part of their portfolio around the time of triple witching. Many traders are nervous about triple witching, but with the information in this article, you will be able to minimize your risk and increase your profits. Offset the position – you could buy or sell the equivalent amount to balance your futures trade before the expiry. In some cases, this may be true, but triple witching can also be a rather calm event, with lower volatility and a statistical bias to the upside (at lease for S&P 500 futures) during the week of and on triple witching. 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.

Some derivatives have monthly expiries that also settle on the third Friday (of each month). 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 2). These days, there are plenty of other derivatives that expire on different dates too. Please note that foreign exchange and other leveraged trading involves significant risk of loss.

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. Triple witching denotes a distinct market event when stock options, stock index futures, and stock index options expire concurrently.

The phenomenon of triple witching has left an indelible mark on financial markets time and again. By delving into historical instances, we can glean insights into its potent influence on market turbulence. 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. U.S.-style put and call options give their buyer the right to buy or sell the underlying at any time up to the expiration date. European-style put and call options give their buyer the right to buy or sell the underlying only on the expiration date. We can’t always know whether underlying stocks will go up or down in these auctions, but we can say we consistently see much higher volumes than usual.

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