TRIPLE WITCHING |
| Credit: TheStreet |
What is Triple Witching?
• Triple witching is the simultaneous expiration of stock options, stock index features, and stock index options contracts all on the same trading day. This happens four times a year: on the third Friday of March, June, September, and December.
• Because three options classes that could share the same underlying expire all on the same day, it can cause increased trading volume and unusual price action in the underlying assets.
Understanding Triple Witching
• Triple witching days generate trading activity and volatility because contracts that are allowed to expire may necessitate the purchase or sale of the underlying security.
• While some derivative contracts are opened with the intention of buying or selling the underlying security, traders seeking derivative exposure only must close, roll out, or offset their open positions prior to the close of trading on triple witching days.
• Trader's Triple witching days, particularly the final hour of trading preceding the closing bell. known as the triple witching hour. can result in escalated trading activity and volatility as close, roll out, or offset their expiring positions.
• Since 2002, with the debut of single stock features, there have actually been four types of expiring contracts, meaning triple witching days are often in fact a quadruple witching, though this term has not quite caught on.
Examples of Triple Withching:
• Friday, March 15, 2019, was the first triple witching day of 2019. Trading volume leading up to this third Friday of the month saw increased market activity. According to a Reuters report, trading volume on March 15, 2019, on U.S. market exchanges was "10.8 billion shares, compared to the 7.5 billion average" over the past 20 trading days.
• For the week leading into triple witching Friday, the S&P 500 was up 2.9% while the Nasdaq was up 3.8%, and the Dow Jones Industrial Average (DJIA) was up 1.6%. However, it appears much of the gains happened before triple witching Friday because the S&P was only up by 0.50% while the Dow was only up 0.54% Friday.
Conclusion
• Witching days are important because they set expiry prices for so many derivatives, both futures, and options, as well as prices for index additions and deletions. Staying hedged (or correctly exposed) results in significant trading in the auctions.
• 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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