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Last Triple Witch of the Year

Triple witching is not a supernatural phenomenon, nor is it a mystery. Friday, December 15th is the last triple witching expiration day for 2023. It only 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 the triple witching day, traders and investors close out any outstanding hedges. The collective actions of these trades can result in a surge in trading activities and an expansion in volume as traders adjust their portfolios.


Expirations are not the only thing that occurs on the third Friday of the quarter. Major indexes also schedule 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 during the triple witching week. The market on close order flows from index funds also tend to be substantially higher on the day of the expirations.


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 occur at 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 require one party to physically deliver 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 the triple witching days, it is reasonable to expect higher volume and an increase in volatility.


The past two triple-witching expiration days (i.e., 6/16/23 and 9/15/23) experienced explosive volatility and volume. Market actions were decidedly bullish two to four days before the expiration date. Unfortunately, on the day of the triple-witching expiration days, stocks closely lower, experiencing high volatility and volume into the close of the expiration day.


The December 15th triple witching day coincides with the last Fed FOMC for 2023 as volume has picked up dramatically, as the Fed holds interest rates steady for the third consecutive time and hints at three rate cuts in 2024.


Will SPX experience another explosive volume day on Friday, December 15th, coinciding with the final triple witching day of 2023?


Based on the recent sharp rally and the overbought condition, will profit-taking occur?


Source: Chart courtesy of StockCharts.com

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