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Another Triple Witching Day

This coming Friday is another triple witching expiration day. It happens four times a year. On the third Friday of every quarter (i.e., March, June, September, and December), three financial products, including index options, index futures, and single stock options, simultaneously expire on the same day.


On triple witching day, traders and investors will close out any outstanding hedges. The collective actions of these trades can result in an increase in trading activities and expansion in volume.


Expirations are not the only thing that occurs on the third Friday of the quarter. Major indexes also schedule their quarterly and annual rebalancing to coincide with this date (i.e., S&P U.S. Indexes, FTSE Global Indexes, and Nasdaq 100 Index). Index rebalancing coupled with the expirations of options, index futures, and single stock options translates to significantly higher trading volume and market volatility on triple witching days. The market on close order flows from index funds also tend to be substantially higher.


Is there a time when witching hour occurs?


It depends. Not all trades need to occur at the same time. Single stock trades occur at the close auction. Index products trade during the open auction. Opening stock auctions are more skewed toward index weight. Also, derivatives expire with the underlying stock requiring delivery. For instance, stock options have physical delivery. Exercised options tend to require one party physically delivering the actual stock to the counterpart. Index derivatives are cash-settled. Settled options occur with the exchange of cash from the profit or loss of the business day following expiration.


With the above scenarios, positions and hedges often need to be closed or un-hedged. Although it is difficult to know whether underlying stocks and indexes will rally or decline during triple witching days, it is reasonable to expect higher volume and greater volatility.


Over the past four triple witching weeks and triple witching expiration days market volatility and volume expanded. Thursday and especially Friday of the expiration week experienced the greatest volatility and volume. Although the current expiration week has been relatively stable, will SPX again experience higher than normal volume and volatility tomorrow, coinciding with yet another triple witching day?


Enclosed below are the market activities of SPX during the week of the triple witching expiration periods over the past year.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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